Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,750,000 in 2021 for the mining site and spent an additional $750,000 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 Outflow Probability
1 $ 450,000 15 %
2 550,000 45 %
3 750,000 40 %
To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $270,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 12%.
Required:
1. Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.
2. Prepare journal entries for :
a. Record the acquisition costs of the mine.
b. Record the purchase of equipment.

Jackpot Mining Company

1. Journal Entries to

a) record the acquisition cost of ths mine:

Debit Investment in Copper Mine $1,750,000

Credit Cash $1,750,000

To record the cost of acquiring the mining site

Debit Investment in Copper Mine $750,000

Credit Cash $750,000.

To record the cost of preparing the mine site.

Debit Investment in Copper Mine $390,844

Credit Restoration Liability $390,844

To record the provision for mine restoration liability.

b) the purchase of equipment:

July 1, 2021

Debit Equipment $270,000

Credit Cash $270,000

To record the purchase of equipment.

Explanation:

a) Data and Analysis:

2021 Investment in Copper Mine $1,750,000 Cash $1,750,000

2021 Investment in Copper Mine $750,000 Cash $750,000

Restoration cost:

        Cash Outflow Probability Expected Cost

1            $ 450,000         15 %         $67,500

2              550,000        45 %         247,500

3              750,000        40 %         300,000

Expected restoration cost =        $615,000

Adjusted risk-free interest rate = 12%

Mining period before restoration = 4 years

PV of restoration cost = $390,844

N (# of periods)  4

I/Y (Interest per year)  12

PMT (Periodic Payment)  0

FV (Future Value)  $615,000

Results

PV = $390,843.62

Total Interest$224,156.38

Purchase of new equipment"

July 1, 2021 Equipment $270,000 Cash $270,000

Total cost of copper mine:

Acquisition cost      $1,750,000

Additional cost            750,000

Restoration cost         390,844

Total cost of mine $2,890,844

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