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. The company's controller has provided the following three cash flow possibilities for the restoration costs:

The company's credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends on December 31.
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?
4. 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?

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. The company's controller has provided the following three cash flow possibilities for the restoration costs:

The company's credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends on December 31.
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?
4. 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?

Quizplus · Accepted Answer

The Answer of 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. The company's controller has provided the following three cash flow possibilities for the restoration costs:

The company's credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends on December 31.
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?
4. 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?

Calegari Mining Paid $2 Million to Obtain the Rights to Operate