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

Answer 1

The acquisition of the mine would include a credit to cash of $150,000 and a credit to asset retirement liability of $50,000, with corresponding debits to mining assets and asset retirement obligation.

Step-by-step explanation:

The recording of the acquisition of a mine by Mining Ventures would involve several journal entries to account for the land purchase, exploration costs, development costs, and the asset retirement liability. The correct journal entries based on the information provided would be:

• Debit to mining assets of $150,000 (land purchase plus exploration and development costs).
• Credit to cash of $150,000, reflecting the outflow of cash for the land, exploration, and development costs.
• Debit to asset retirement obligation of $50,000 for the present value of the estimated cost of restoration.
• Credit to asset retirement liability of $50,000, recognizing the liability that has been incurred for the future restoration costs.

The correct options from the choices provided are therefore 2) Credit to cash $150,000 and 3) Credit to asset retirement liability of $50,000. While option 4) Debit to mining assets of $200,000 seems plausible, it does not take into account the separate recognition of the asset retirement obligation. Options 1) and 5) are incorrect because the amounts specified do not match the total amounts in the problem.