Question

Mining Ventures purchases land and the rights to explore for 100,000. Exploration costs are20,000, and development costs are 30,000. The estimated cost of restoration, calculated as the present value of expected cash outflows, is50,000. The journal entry to record the acquisition of the mine will include which of the following entries?

1) Credit to cash $150,000
2) Debit to mining assets of $200,000.
3) Credit to cash of $200,000.
4) Credit to asset retirement liability of $50,000.
5) Debit to asset retirement obligation of $150,000.

Answer 1

The acquisition of the mine by Mining Ventures would be recorded with a debit to mining assets of $200,000 and a credit to cash of $150,000. Additionally, there would be a credit to asset retirement liability of $50,000 for the restoration costs.

Step-by-step explanation:

The journal entry to record the acquisition of the mine by Mining Ventures will include the following entries: a debit to mining assets and a credit to either cash or a liability account depending on how the purchase was financed. The total of the acquisition, exploration, and development costs amounts to $150,000 ($100,000 for acquisition, $20,000 for exploration, and $30,000 for development).

This will be the amount debited to mining assets. In addition, the estimated cost of restoration should be recognized as an asset retirement obligation when the asset is placed in service. Hence, there will also be a debit to the mining assets for the restoration costs of $50,000, and a corresponding credit to asset retirement obligation for the same amount.

Therefore, the correct journal entries are a debit to mining assets of $200,000 (accumulating acquisition, exploration, development, and restoration costs) and a credit to cash of $150,000 for the cash paid, and a credit to asset retirement liability of $50,000 for the restoration costs. Entry number 2 and entries 3 and 4 from the options provided would be included in properly recording the transaction.