Reference no: EM133177020

Question - Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $7.0 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) $640,000, 25% probability; (2) $690,000, 50% probability; and (3) $790,000, 25% probability. The company's credit-adjusted, risk-free rate of interest is 6%. 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 $736,000, what amount of gain or loss will Smithson recognize on retirement of the liability?