Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.9 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company's controller has provided the following three cash flow possibilities for the restoration costs: (1) $530,000, 25% probability; (2) $580,000, 40% probability; and (3) $680,000, 35% probability. The company's credit-adjusted, risk-free rate of interest is 7%. (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) What is the book value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $626,000, what amount of gain or loss will Smithson recognize on retirement of the liability?
Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.9 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company's controller has provided the following three cash flow possibilities for the restoration costs: (1) $530,000, 25% probability; (2) $580,000, 40% probability; and (3) $680,000, 35% probability. The company's credit-adjusted, risk-free rate of interest is 7%. (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) What is the book value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $626,000, what amount of gain or loss will Smithson recognize on retirement of the liability?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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M77.
Transcribed Image Text:Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.9 million. After the silver
is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a
wildlife preserve. The company's controller has provided the following three cash flow possibilities for the restoration costs: (1)
$530,000, 25% probability: (2) $580,000, 40% probability; and (3) $680,000, 35% probability. The company's credit-adjusted, risk-free
rate of interest is 7%. (FV of $1. PV of $1. EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables
provided.)
What is the book value of the asset retirement liability at the end of one year?
Assuming that the actual restoration costs incurred after extraction is completed are $626,000, what amount of gain or loss will
Smithson recognize on retirement of the liability?
(Do not round intermediate calculations. Enter your answer in whole dollars.)
Answer is complete but not entirely correct.
Liability
Loss on retirement
$
626,000x
23,500
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