Question

Calegari Mining paid $2 million to obtain the rights to operate a coal mine in Tennessee. Costs of exploring for the coal deposit totaled $1,500,000, and development costs of $5 million were incurred in preparing the mine for extraction, which began on January 2, 2018. After the coal is extracted in approximately five years, Calegari is obligated to restore the land to its original condition. Assume the incremental borrowing rate (interest rate) of the company is 7 %. The company's controller has provided the following three cash flow possibilities for the restoration costs: Cash Flow $1,000,000 1,400,000 1,800,000 Probability 10% 2. 60% 3. 30% Required: 1. What is the initial cost of the coal mine? (Round computations to nearest whole dollar.) 2 How much accretion expense will Calegari report in its 2018 and 2019 income statements? 3. What is the book value of the asset retirement obligation that Calegari will report in its 2018 and 2019 balance sheets? Assume that actual restoration costs incurred in 2023 totaled $1,370,000. What amount of gain or loss will Calegari recognize on retirement of the liability? 4 =ন

Answer 1

(1)initial cost

=acquisition cost+exploration cost+ development cost + present value of restoration cost

=$2million+$1.5million+$5 million

=8.5$ million

restoration cost

1	1000000	10%	100000
2	1400000	60	840000
3	1800000	30	540000
		total cost	1480000

present value = 1480000*[1/1.07]⁵

^{=0.712986*1480000}

⁼1055220$

initial cost = 1055220+8500000

=9555220$

(2)

2018=1055220*7%*1year =73865$

2019=1129085*7%*1 year =79036$

(3)book value

1055220+73865=1129085 =2018

2019 = 1129085+73865=1202950

(4)book value at 2023

book value	accretion cost		book value
2018	1055220	73865 [1055220*7%]	1129085
19	1129085	79036[1129085*7%]	1208121
20	1208121	84568	1292689
21	1292689	90488	1383177
22	1383177	96822	14800000

gain(Loss) =book value- actual cost

=13700000-14800000

=110000$ Gain