Question

Marlin purchases land and the rights to explore for 200,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is 40,000. The journal entry to record the acquisition of the mine will include which of the following entries?

1) Debit to mining assets of 200,000.
2) Credit to asset retirement liability of 40,000.
3) Debit to mining assets of 160,000.
4) Credit to cash of 240,000.

Answer 1

Marlin's acquisition journal entry should include a debit to mining assets of 200,000 and a credit to asset retirement liability of 40,000, reflecting the purchase and estimated restoration costs.

Step-by-step explanation:

The correct entries to record the acquisition of the mine would be:

Debit to mining assets of $200,000

Debit to asset retirement liability of $40,000

Credit to cash of $240,000

The debit to mining assets reflects the purchase of the land and exploration rights. The debt to asset retirement liability represents the estimated cost of restoration. The credit to cash accounts for the outflow of funds in the acquisition.

The correct journal entry to record the acquisition of the mine will include a debit to mining assets of 200,000 and a credit to asset retirement liability of 40,000. When Marlin purchases the land and the rights to explore for 200,000 and estimates the cost of restoration at 40,000, the initial recognition of the asset retirement obligation should be at the present value of the estimated cost of restoration. Accordingly, the entry reflects the recognition of the full cost of the land and rights, as well as the present value of the estimated restoration costs.