Answer:
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On March 1, 2018, Shipley Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for $6 million. The mine is expected to produce 100,000 tons of mineral. As part of the agreement, Shipley agrees to restore the land to its original condition after mining operations are completed in approximately five years. Management has provided the following possible outflows for the restoration costs that will occur five years from now:
Cash Outflow Probability
$ 300,000 25 %
400,000 50 %
500,000 25%
Shipley's credit-adjusted risk-free interest rate is 10%. During 2018, Shipley extracted 18,000 tons of ore from the mine. How much accretion expense will the company record in its income statement for the 2018 fiscal year?
A) $30,326.
B) $20,697.
C) $24,837.
D) $27,294.
answer : $20697 (B)
Explanation:
Determine how much accretion expense the company will record in its income statement
from the table
cash flow : $300000 * 25% = $75000
$400000 * 50% = $200000
$500000 * 25% = $125000
At the present value of $1,
number of years (n) = 5
interest (i) = 10% = 0.1
2018 accretion expense will be calculated as
($400000 * 0.62092) * 0.10 * 10/12 = $20697
