Jackpot Mining Company operates a copper mine in central Montana. The company paid 1,000,000 in 2016 for the mining site and spent an additional 600,000 to prepare the mine for extraction of the copper.
After the copper is extracted in approximately four years, the company is required to restore the land to its original condition , including repaving of roads and replacing a greenbelt.
The company has provided the following three cash flow possibilities for the restoration costs:
Cash outflowProbability
1. 300,00025%
2. 400,00040%
3. 600,00035%
To aid extraction, Jackpot purchased some new equipment on July 1, 2016, for $120,000.
After the copper is removed from this mine, the equipment will be the sold for an estimated residual amount of 20,000. There will be no residual value for the copper of mine.
The credit adjusted risk free rate of interest is 10%.
The company expects to extract 10 million pounds of copper from the mine.
Actual production was 1.6 million pounds in 2016 and 3 million pounds in 2017.
1. Compute the depletion and depreciation on the mine and mining for 2016 and 2017. The units of production method is used to calculate depreciation.
2. Discuss the accounting treatment of the depletion and depreciation on the mine and mining equipment.