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

question 79

Essay

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, 2009. 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 2009 and 2010 income statements?
3. What is the carrying value (book value) of the asset retirement obligation that Calegari will report in its 2009 and 2010 balance sheets?
4. Assume that actual restoration costs incurred in 2014 totaled $1,370,000. What amount of gain or loss will Calegari recognize on retirement of the liability?
$\begin{array}{lrr}&\text { Cash Flow}&\text { Probability }\\\text { 1. } & \$ 1,000,000 & 10 \% \\\text { 2. } & 1,400,000 & 60 \% \\\text { 3. } & 1,800,000 & 30 \%\end{array}$

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Definitions:

Carbon Atoms

The basic building blocks of organic molecules, capable of forming a vast array of compounds due to its four valence electrons.

Hydrogen Atoms

The simplest type of atom, consisting of one proton in the nucleus and one electron orbiting the nucleus.

Straight-Chain Alkanes

Hydrocarbons containing only single bonds in a continuous chain without any branches.

Acceptable Name

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