Wasting assets

LECTURE NOTES
Costs of Wasting Assets

Acquisition

Exploration and evaluation

Development

Restoration

Exploration and evaluation expenditures

Expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before
the technical feasibility and commercial
viability of
extracting a mineral resource are demonstrable.
Exploration and evaluation assets
Exploration and evaluation expenditures recognized as
assets in accordance with the entitys accounting policy.

PFRS 6 Exploration for and Evaluation of Mineral

Resources
PFRS 6 permits an entity to develop an accounting policy
for exploration and evaluation assets without specifically
considering the requirements of paragraphs 11 and 12 of
PAS 8. Thus, an entity adopting PFRS 6 may continue to
use the accounting policies applied immediately before
adopting the PFRS.
This includes continuing to use
recognition and measurement practices that are part of
those accounting policies.

Reclassification of Exploration and Evaluation Asset

An exploration and evaluation asset shall no longer be
classified as such when the technical feasibility and
commercial viability of extracting a mineral resource are
demonstrable. Exploration and evaluation assets shall be
assessed for impairment, and any impairment loss
recognized, before reclassification.
Development Cost

Methods used before PFRS 6

Intangible
e.g. Cost of drilling and construction of wells

Successful effort method

Include in the cost of wasting asset

Cost of successful exploration Capitalized

Cost of unsuccessful exploration Expensed

Tangible
e.g. Building and machinery and equipment

Successful The technical feasibility and commercial

viability of extracting a mineral resource are demonstrable

Recognize as separate asset

Full cost method

Depreciation method:
Same method for other PPE

All exploration and evaluation expenditures are capitalized

Key Definitions

If the problem is silent

Useful life > Life of WA Output
Useful life < Life of WA Straight line

Exploration for and evaluation of mineral resources

Estimated Restoration Cost

The search for mineral resources, including minerals, oil,

natural gas and similar non-regenerative resources after
the entity has obtained legal rights to explore in a specific
area, as well as the determination of the technical
feasibility and commercial viability of extracting the
mineral resource.

Included when recognized as provision. Therefore the

restoration cost must
Be a present obligation,
Represent a probable outflow of economic resources,
and
Be measurable reliably

Examples of Exploration and Evaluation Activities

acquisition of rights to explore

topographical, geological, geochemical and geophysical
studies
exploratory drilling
trenching
sampling
activities in relation to evaluating the technical
feasibility and commercial viability of extracting a
mineral resource

STRAIGHT PROBLEM
In 2005, Hukay Mining Company purchased property with
natural resources P6,200,000. The property was relatively
close to a large city and had an expected residual value of
P900,000.

Page 1 of 4

The following information relates to the use of the

property.

PROFESSIONAL REVIEW and TRAINING CENTER, INC.

a) In 2005, Hukay spent P400,000 in development costs
and P300,000 in buildings on the property, Hukay does
not anticipate that the buildings will have utility after
the natural resources are depleted.
b) In 2006 and 2008, P300,000 and P800,000,
respectively, were spent for additional developments
on the mine.
c) The tonnage mined and estimated remaining tons for
years 2005-2009 are as follows:
Tons
Extracted
0
1,500,000
1,800,000
1,700,000
900,000

Year
2005
2006
2007
2008
2009

Estimated
Tons Remaining
5,000,000
3,500,000
2,000,000
900,000
0

REQUIRED:
Compute the depletion and depreciation expense for the
years 2005 2009.
SUGGESTED SOLUTION GUIDE:

Output
1,500,000
1,800,000
1,700,000
900,000

Year
2005
2006
2007
2008
2009

Output
1,500,000
1,800,000
1,700,000
900,000

Rate

Depreciation
90,000
108,000
68,000
34,000

0.06
0.06
0.04

Computation of depreciation rate - 2006

Cost/DA of building
/Estimated reserves
Depreciation rate

300,000
5,000,000
0.06

Computation of depreciation rate - 2007

Cost/DA of building
Depreciation 2006
Remaining DA, 1/1/07
/Est. reserves, 1/1/07
Depreciation rate

P
(

300,000
90,000)
210,000
3,800,000
0.06

Computation of depreciation rate - 2008

Depletion
Year
2005
2006
2007
2008
2009

Depreciation

Rate
1.20
1.11
1.15

Depletion
1,800,000
1,998,000
1,955,000
1,047,000

Remaining DA, 1/1/07

Depreciation 2007
Remaining DA, 1/1/08
/Est. reserves, 1/1/08
Depreciation rate

P
(

210,000
108,000)
102,000
2,600,000
0.04

- end -

Computation of depletion rate - 2006

Cost of land
Development cost 2005
Development cost 2006
Total cost
Residual value
Depletable amount
/Estimated reserves
Depletion rate

P6,200,000
400,000
300,000
6,900,000
( 900,000)
6,000,000
5,000,000
1.20

Computation of depletion rate - 2007

Original DA
Depletion 2006
Remaining DA, 1/1/07
/Est. reserves, 1/1/07
Depletion rate

P6,000,000
(1,800,000)
4,200,000
3,800,000
1.11

Computation of depletion rate - 2008

Remaining DA, 1/1/07
Depletion 2007
Remaining DA, 1/1/08
Development cost 2008
Depletable amount-2008
/Est. reserves, 1/1/08
Depletion rate

Page 2 of 4

P4,200,000
(1,998,000)
2,202,000
800,000
3,002,000
2,600,000
1.15

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MULTIPLE CHOICE PROBLEMS
1.

Zambales Company acquired property in 2009 which

contains mineral deposit. The acquisition cost of the
property was P20,000,000.
Geological estimates
indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can
be sold for P5,000,000 following mineral extraction.
For P2,000,000, Zambales is legally required to restore
the land to a condition appropriate for resale. After
acquisition, the following costs were incurred:
Exploration cost
Development cost related to drilling
of wells
Development cost related to
production equipment

Approach 3 - 70% probability of total decontamination

cost of P1,500,000 at the end of 30 years.
Assuming that the appropriate interest rate is 8%, the
cost of the nuclear waste repository site is
a. P606,384
c. P659,500
b. P156,072
d. P500,000
P12-56, Skousen 15th ed
5.

Botolan Company quaries limestone, crushes it and

sells it to be used in road building. Botolan paid
P20,000,000 for a certain quarry on January 1, 2008.
The property can be sold for P4,000,000 after
production ceases.
The original total estimated
reserves totaled 5,000,000 tons.
Botolan quarried
500,000 tons in 2008 and 1,500,000 tons in 2009. An
engineering study performed in 2009 indicated that as
of December 31, 2009, 4,500,000 tons were available.
Botolan Company should record 2009 depletion at
a. P3,600,000
c. P4,800,000
b. P6,000,000
d. P4,500,000

6.

Masinloc Company purchased a tract of resource land

in 2008 for P39,600,000. The content of the tract was
estimated at 1,200,000 units. When the resource has
been exhausted, it is estimated that the land will be
worth P1,200,000. Fixed installations were set up at a
cost of P9,600,000. Mining equipment was purchased
on January 2, 2009 for P12,400,000. The life of the
fixed installations is 8 years and the equipment, 4
years. In 2009, 120,000 units have been extracted.
This was one half of the annual extraction which can
be expected following the first year of operations.

P13,000,000
10,000,000
15,000,000

The company extracted 600,000 tons of the mineral in

2009 and sold 450,000 tons. In the 2009 income
statement, what amount of depletion is included in
cost of sales?
a. P4,800,000
c. P3,600,000
b. P5,400,000
d. P4,050,000
2.

Natural, Incorporated embarked on a new venture in

Northern Luzon in 2009. It expects to glean 2,000,000
ounces of a precious ore from its holdings there, over
several years. Relevant data follow:
Cost of the Mineral Rights
Exploration Cost, 2009
(1/3 successful)
Extraction Cost, 2009
Ore extracted, 2009
Ore sold, 2009

P 500,000
1,500,000
2,000,000
500,000 oz.
300,000 oz.

Masinloc Company should record total depreciation for

2009 at
a. P4,060,000
c. P2,200,000
b. P3,100,000
d. P 960,000

What is the depletion for 2009, using the successful

efforts method of accounting for exploration costs?
a. P350,000
c. P250,000
b. P300,000
d. P150,000
3.

On January 1, 2009, Major Company purchased a

uranium mine for P800,000.
On that date, Major
estimated that the mine contained 1,000 tons of ore.
At the end of the productive years of the mine, Major
Company will be required to spend P4,200,000 to clean
up the mine site. The appropriate discount rate is 8%,
and it is estimated that it will take approximately 14
years to mine all of the ore.
Major uses the
productive-output method of depreciation.
During
2009, Major extracted 100 tons of ore from the mine.
Compute the amount of depletion for 2009.
a. P114,408
c. P223,000
b. P 80,000
d. P500,000
E13-31 Skousen 15th ed

4.

Burns Company has purchased land that will serve as a

temporary .repository for nuclear waste. The site will
function for 30 years, at which time Burns will be
required to completely decontaminate the land. The
purchase price for the land is P500,000. Burns knows
that the land will have to be decontaminated but isn't
sure which of several possible approaches will be
sufficient to reach the level of decontamination
necessary by law. The costs of each approach, and the
estimated probability that the approach will be the one
used, follow:
Approach 1 - 10% probability of total decontamination
cost of P5,000 at the end of 30 years.
Approach 2 - 20% probability of total decontamination
cost of P100,000 at the end of 30 years.

Page 3 of 4

7.

Leyte Company constructed a building costing

P15,000,000 on a mine property. The building has an
estimated life of 6 years with no salvage value. After
all the resource is removed expectedly over 5 years,
the building will be of no use.
The estimated
recoverable output from the mine is 1,000,000 tons.
During the first year, Leyte produced 200,000 tons but
there was shut down and no output in the second year.
In the third year, Leyte resumed operations and
produced 300,000 tons. Leyte Company should record
depreciation of the building in the third year at
a. P3,000,000
c. P3,600,000
b. P2,500,000
d. P4,500,000

8.

ABC Company provides the following balances at the

end of 2009:
Wasting asset, at cost
Accumulated depletion
Retained earnings
Capital liquidated
Depletion based on 100,000 units
extracted at P50 per unit
Inventory of resource deposit
(20,000 units)

P80,000,000
20,000,000
10,000,000
15,000,000
5,000,000
2,000,000

Compute for the maximum amount of dividend that

ABC can declare on December 31, 2009.
a. P20,000,000
c. P15,000,000
b. P14,000,000
d. P13,000,000

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PROBLEM
1.

2.

3.

4.

During 2009, Bolton Corporation acquired a mineral

mine for P1,500,000 of which P200,000 was ascribed
to land value after the mineral has been removed.
Geological surveys have indicated that 10 million units
of the mineral could be extracted.
During 2009,
2,000,000 units were extracted and 1,600,000 units
were sold. What is the amount of depletion expensed
for 2009?
a. P300,000
c. P240,000
b. P208,000
d. P260,000
On July 1, 2009, Iba Mining Company, a calendar-year
corporation, purchased the rights to a copper mine. Of
the total purchase price, P2,800,000 was appropriately
allocable to copper. Estimated reserves were 800,000
tons of copper. Iba expects to extract and sell 10,000
tons of copper per month.
Production began
immediately. The selling price is P2,500 per ton. If
sales and production conform to expectations, what is
Ibas depletion expense on this mine for financial
accounting purposes for the calendar year 2009?
a. P 35,000
c. P410,000
b. P210,000
d. P
0
An oil company using the successful-efforts method
drilled two wells. The first, a dry hole, cost P50,000.
The second cost P100,000 and had estimated
recoverable reserves of 25,000 barrels, of which
10,000 were sold this year. What will be the total
expense for the year related to the exploration and
production from these two wells?
a. P40,000
c. P 90,000
b. P60,000
d. P150,000
In 2007, Lepanto Mining Company purchased property
with natural resources for P28,000,000. The property
had a residual value of P5,000,000. However, the
company is required to restore the property to its
original condition for P2,000,000.

incurred in 2009, and the estimate of total recoverable

deposits (including the amount extracted in 2008) was
revised to 925,000 metric tons. During 2009, the
company recovered 150,000 metric tons.
The depletion for the year 2009 is
a. P603,658
c. P676,500
b. P618,750
d. P750,000
Use the following information for the next two questions.
The APPLE MINING Co. on May 31, 2009, acquired the
rights to a coal mine containing an estimated reserves of
1,000,000 tons of coal. The company estimated that
12,500 tons of coal would be extracted and sold each
month. Cost allocable to coal was P3,500,000.
Also on May 31, 2009, the company purchased an
equipment to be used in the production, costing P95,000
which has an estimated useful life of 10 years.
The
equipment was expected to become obsolete after all the
coal deposits had been extracted from the mine and only
P5,000 selling price of the equipment could be expected.
Production was in full blast since June 1, 2009.
6.

What would be the depletion expense for the year

ended December 31, 2009?
a. P525,000
c. P153,125
b. P262,500
d. P306,250

7.

What would be the depreciation expense on the new

equipment for the year ended December 31, 2009?
a. P9,000
c. P7,875
b. P4,500
d. P8,313

8.

On July 1, 2009 Cabangan Company purchased rights

to a mine. The total purchase price was P50,000,000
of which P5,000,000 was allocated to the land.
Estimated reserves were 6,000,000.
Cabangan
expects to extract and sell 100,000 tons per month.
Cabangan Company purchased new equipment on July
1, 2009 for P21,000,000 with estimated life of 8 years.
However, after all the resource is removed, the
equipment will be of no use and will be sold for
P3,000,000.
What is the depreciation of the
equipment for 2009?
a. P1,800,000
c. P2,100,000
b. P1,125,000
d. P3,600,000

9.

Toledo Mining Company constructed a building costing

P2,800,000 on the mine property.
Its estimated
residual value will not benefit the company and will be
ignored for purposes of computing depreciation. The
building has an estimated life of 10 years. The total
estimated recoverable units from the mine is 500,000
tons. The company's production of the first four years
of operations was:
First year
100,000 tons
Second year
100,000 tons
Third year
Shut down, no output
Fourth year
100,000 tons

In 2007, Lepanto spent P1,000,000 in development

costs and P3,000,000 in buildings on the property.
Lepanto does not anticipate that the buildings will have
utility after the natural resources are removed. In
2008, an amount of P1,000,000 was spent for
additional development on the mine. The tonnage
mined and estimated remaining tons for years 2007 to
2009 are as follows:
2007
2008
2009

Tons extracted
0
3,000,000
3,500,000

Tons remaining
10,000,000
7,000,000
2,000,000

The company should recognize depletion for 2009 at

a. P10,150,000
c. P14,245,000
b. P12,040,000
d. P 9,450,000
5.

Yakal Exploration Co. purchased in 2007 a property

that contained mineral deposit for P4,500,000.
Estimated recovery was P1,000,000 metric tons of
deposits.
Development costs P150,000 were also
incurred in the same year. The mining property was
expected to be worth P600,000 after the mineral
deposits had all be removed.
During 2008, the
company extracted and sold 100,000 metric tons of
minerals. Further development costs of P75,000 were

Page 4 of 4

What is the depreciation for the fourth year?

a. P490,000
c. P210,000
b. P560,000
d. P336,000

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