Accountancy Review Center (ARC)
of the Philippines Inc.
One Dream, One Team
FINANCIAL ACCOUNTING AND REPORTING
FAR.126—WASTING ASSETS
STUDENT HANDOUTS
CABARLES/SAGOT/CAYETANO
MAY 2021 CPALE REVIEW
LEARNING OBJECTIVES
1. To determine the initial measurement of natural
resource (wasting asset)
2. To compute the amount of depletion
3. To compute the amount of depletion expense
4. To compute for the revised depletion rate
5. To compute for the amount depreciation expense
6. To determine the maximum amount of dividend a
wasting company can declare
REVIEW NOTES
Wasting Asset – Are material objects of economic and utility
to man produced by nature. Actually, wasting assets are
natural resources. Wasting assets are sold called because
these are physically consumed and once consumed, the
assets cannot be replaced anymore.
Initial Measurement – In general, the cost of wasting asset
can be divided into four categories, namely:
1.
2.
3.
4.
Acquisition cost
Exploration cost
Development cost
Restoration cost
Initial cost of wasting asset
P XX
XX
XX
XX
P XX
2. Exploration & evaluation cost – is the expenditure
incurred before the technical feasibility and commercial
viability of extracting a mineral resource are
demonstrated. Simply stated, it is the cost to locate the
natural resource.
Example of exploration and evaluation:
a. Acquisition of rights to explore
b. Topographical, geological, geochemical and
geophysical studies
c. Exploratory drilling
d. Trenching
e. Sampling
f. Activities in relation to evaluating the technical
feasibility and commercial viability
g. General and administrative costs directly attributable
to exploration and evaluation
•
•
Accounting
for
Exploration
and
Successful Effort Method – The exploration cost
directly related to the discovery of commercially
producible natural resource is capitalized as cost of
the resource property. The exploration cost related
to “dry holes” or unsuccessful discovery is expensed
in the period incurred.
Full Cost Method – All exploration costs, whether
successful or unsuccessful, are capitalized as cost of
the successful resource discovery.
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a. Tangible Development Cost – includes all of the
transportation and other heavy equipment needed to
extract the resource and get it ready for market.
Tangible Development Cost are capitalized and
accounted for as Property, Plant and Equipment
under PAS 16.
b. Intangible Development Cost – includes drilling
costs, tunnels, shafts, and well.
Intangible
Development Cost are capitalized and accounted
for as Wasting Asset under PFRS 6.
1. Acquisition cost – is the price paid to obtain the property
containing the natural resources.
Methods of
Evaluation:
3. Development Cost – cost of preparing the site for
extraction.
4. Restoration Cost – is the cost to be incurred in order to
bring the property to its original condition. The estimated
restoration cost must be discounted (present value).
Depletion – The removal, extraction or exhaustion of a
natural resource is called depletion. It is the systematic
allocation of the depletable amount of a wasting asset over
the period the natural resource is extracted or produced.
Depletion charge for each period shall form part of
inventory.
1ST – Initial cost of wasting asset:
Acquisition cost
Exploration cost
Development cost
Restoration cost
Initial cost of wasting asset
P XX
XX
XX
XX
P XX
2ND – Depletable amount:
Initial cost of wasting asset
Less: Residual value
Depletable amount
P XX
( XX)
P XX
3RD – Depletion rate:
Depletable amount
P XX
Divide: Total estimated output
XX
Depletion rate
P XX
4TH – Depletion:
Depletion rate
Times: Units extracted
Depletion
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P XX
XX
P XX
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FAR | FAR.121—WASTING ASSET
ARC – ACCOUNTANCY REVIEW CENTER
Depletion Expense – Is the portion of depletion that
becomes expense when it is sold. Depletion expense is also
known as depletion included in the cost of goods sold.
Depletion rate
Times: Units sold
Depletion
P XX
XX
P XX
Revision of Depletion Rate – Computation of the new
depletion rate is necessary when any of the following are
present:
1. Additional development cost in the succeeding year
2. Change in estimated output
3. Change in residual value
1ST – Carrying amount on the date of change:
Initial cost of wasting asset
Add: Additional dev. cost
Less: Accumulated depletion
Carrying amt on change date
P XX
XX
(XX)
P XX
2ND – New depletable amount:
Carrying amt on change date
Less: New residual value
New depletable amount
P XX
( XX)
P XX
3RD – New Depletion rate:
New Depletable amount
Divide: Revised est. output
New Depletion rate
P XX
XX
P XX
NOTE: If there was a change in depletion rate, use the FIFO
method in determining the depletion rate. Trace the unit sold
as to what year it came from and use the depletion rate on
that particular year.
Depreciation of Tangible Development Cost – The
following are the rules should be observed in determining the
proper depreciation method:
1. With alternative use (movable) – straight-line method over
the useful life of the asset.
2. Without alternative use (immovable):
a. Life of mine is shorter – use output method.
b. Useful life is shorter – use straight-line method.
Maximum Dividend – Under the wasting asset doctrine, due
to the irreplaceable nature of the corporation’s assets,
dividends can be declared not only to the extent of
unrestricted retained earnings but also for the balance of
accumulated depletion to the extent that it is realized and not
yet liquidated.
Unrestricted retained earnings
Add: Accumulated depletion
Less: Capital liquidated
Less: Depletion unsold/unrealized
Maximum dividend
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P XX
XX
( XX)
( XX)
P XX
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FAR | FAR.121—WASTING ASSET
ARC – ACCOUNTANCY REVIEW CENTER
DISCUSSION QUESTIONS
1. The cost of natural resources include:
I.
Acquisition cost
II.
Exploration costs to the extent that they are
capitalized in accordance with an entity’s
accounting policy
III.
Intangible development costs
IV.
Restoration or decommissioning costs
A. I, II
B. I, II, III
C. I, II, IV
D. I, II, III, IV
6. In the full cost method, oil firms
A. Are required to expense all oil-drilling costs resulting
in dry holes.
B. Must expense drilling costs which result in
productive oil wells.
C. Can capitalize all oil-drilling costs.
D. Shall not reduce costs below their recoverable
amounts.
Numbers 2-3
On January 1, 2020, Hilary Company purchased a mineral
mine for P26,400,000 with removable ore estimated at
1,200,000 tons. After it has extracted all the ore, the entity will
be required by law to restore the land to the original condition
at an estimated cost of P2,200,000. The present value of the
estimated restoration cost is P1,800,000. The property can
be sold afterwards for P3,000,000.
7. Tangible development costs
A. Are accounted for under PFRS 6
B. Are capitalized as cost of natural resource and
depreciated over the economic life of the natural
resource
C. Are not capitalized as cost of natural resource but
capitalized as equipment and depreciated separately
D. Are development costs with no physical substance
but nevertheless treated as part of wasting asset
because of the application of substance over form
During 2020, the entity incurred P2,000,000 exploration cost
and P1,600,000 development cost preparing the mine for
productions. The entity removed 80,000 tons of ore and sold
60,000 tons of ore in the current year.
8. Development costs are divided into tangible equipment
and intangible development costs.
The intangible
development costs are generally considered as part of
the depletion base while tangible equipment are normally
not included in the depletion base.
2. What is the depletion for the current year?
C. 1,920,000
C. 1,940,000
D. 1,440,000
D. 1,455,000
3. What amount of depletion should be included in cost of
sales for the current year?
A. 1,920,000
C. 1,500,000
B. 1,440,000
D. 1,590,000
Numbers 6-7
Iris Company acquired property at the beginning of current
year which contains mineral deposit. The acquisition cost of
the property was P20,000,000. Geological estimates
indicated 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, Iris
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
3,000,000
6,000,000
4,000,000
The production equipment has a useful life of 5 years and the
mineral property can be fully depleted in about 8 years. The
equipment has no alternative use. During the current year, the
company extracted 600,000 tons of the mineral and sold
450,000 tons.
4. What amount of depletion should be recognized for
2019?
A. 3,120,000
C. 3,600,000
B. 2,340,000
D. 2,700,000
5. What amount of depreciation is recognized for 2019?
A. 360,000
C. 800,000
B. 500,000
D. 480,000
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I.
Tangible equipment that can be moved and be used
from one site to another should be depreciated over
their useful life or the life of the wasting asset
whichever is shorter.
II.
Tangible equipment that cannot be moved and does
not have alternative use (cannot be used from one
site to another) should be depreciated over their
useful life or the life of the wasting asset whichever is
shorter.
A. True, true
B. True, false
C. False, true
D. False, false
9. Double Chin Company purchased a tract of resource
land in 2020 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, 2021 for P12,400,000.
The life of the fixed installations is 8 years and the
equipment, 4 years. In 2021, 120,000 units have been
extracted. This was one half of the annual extraction
which can be expected following the first year of
operations.
Double Chin Company should record total depreciation
for 2021 at
A. 4,060,000
C. 2,200,000
B. 3,100,000
D.
960,000
10. Changes in residual value or estimated quantity
mineral reserves are
A. Changes in accounting estimates accounted
prospectively
B. Changes in accounting estimates accounted
retrospectively
C. Changes in accounting policy accounted
prospectively
D. Changes in accounting policy accounted
retrospectively
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of
for
for
for
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FAR | FAR.121—WASTING ASSET
ARC – ACCOUNTANCY REVIEW CENTER
11. Deepside Company purchased in 2019 a property that
contained mineral deposit for P4,500,000. Estimated
recovery was 1,000,000 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 2020, the company extracted and sold 100,000
metric tons of mineral. Further development costs of
P75,000 were incurred in 2021, and the estimate of total
recoverable deposits (including the amount extracted in
2020) was revised to 925,000 metric tons. During 2021,
the company recovered 150,000 metric tons.
The depletion for the year 2021 is
A. 603,658
C. 676,500
B. 618,750
D. 750,000
12. 2Beat1 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 years of operations
was:
First year
Second year
Third year
Fourth year
100,000 tons
100,000 tons
Shut down, no output
100,000 tons
What is the depreciation for the fourth year?
A. 490,000
C. 210,000
B. 560,000
D. 336,000
13. Which measurement model applies to exploration and
evaluation assets subsequent to initial recognition?
A. The cost model
C. Either A or B
B. The revaluation model D. Recoverable amount
Numbers 12-16
On January 2, 2019, Legend Company purchased land for
P450,000, from which it is estimated that 400,000 tons of ore
could be extracted. It estimates that it will cost P80,000 to
restore the land, after which it could be sold for P30,000.
During 2019, the company mined 80,000 tons and sold
50,000 tons. During 2020, the company mined 100,000 tons
and sold 120,000 tons. At the beginning of 2021, the
company spent an additional P100,000, which increased the
reserves by 60,000 tons. In 2021, the company mined
140,000 tons and sold 130,000 tons. The company uses a
FIFO cost flow assumption.
Round off depletion rate to two (2) decimal places.
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14. What is the depletion of wasting asset and depletion
included in cost of goods sold for the year 2019?
Depletion Depletion Expense
A. 100,000
62,500
B. 100,000
100,000
C. 112,000
70,000
D. 70,000
112,000
15. The carrying amount of the natural resources as of
December 31, 2019 is
A. 400,000
C. 467,500
B. 430,000
D. 437,500
16. What is the depletion of wasting asset and depletion
included in cost of goods sold for the year 2020?
Depletion Depletion Expense
A. 125,000
150,000
B. 150,000
125,000
C. 140,000
168,000
D. 168,000
140,000
17. The carrying amount of the natural resources as of
December 31, 2020 is
A. 225,000
C. 292,000
B. 305,000
D. 278,000
18. What is the depletion of wasting asset and depletion
included in cost of goods sold for the year 2021?
Depletion Depletion Expense
A. 187,600
160,800
B. 175,000
174,200
C. 140,000
168,000
D. 187,600
173,300
19. The carrying amount of the natural resources as of
December 31, 2021 is
A. 225,000
C. 317,400
B. 259,400
D. 217,400
20. Maureen Company provided the following balances
on December 31, 2020:
Wasting asset, at cost
Accumulated depletion
Capital Liquidated
Retained earnings
Depletion based on 100,000 units
extracted at P30 per unit
Inventory of resource deposit
(20,000 units)
40,000,000
15,000,000
5,000,000
10,000,000
3,000,000
2,000,000
What is the maximum dividend that can be declared
on December 31, 2020?
A. 19,600,000
C. 25,000,000
B. 19,400,000
D. 20,000,000
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FAR | FAR.121—WASTING ASSET
ARC – ACCOUNTANCY REVIEW CENTER
PRACTICE EXAM – PROBLEMS
1. On July 1, 2020, Nerissa Company purchased the rights
to a mine for P13,000,000, of which P1,200,000 was
allocable to the land. Estimated reserves were 1,500,000
tons. The entity expects to extract and sell 25,000 tons
per month. The entity purchased mining equipment on
July 1, 2020 for P9,500,000. The mining equipment had
a useful life of 8 years. However, after all the resource is
removed, the equipment will be of no use and will be sold
for P500,000.
What is the depreciation for 2020?
A. 1,800,000
C. 900,000
B. 1,125,000
D. 562,500
Numbers 2-3
On January 1, 2023, Camia Company purchased a drilling
machine for P8,400,000 with useful life of 10 years and no
residual value. An important component of the machine is the
drill housing component that will need to be replaced in 5
years. The P2,000,000 cost of the drill housing component is
included in the P8,400,000 cost of the machine. The straightline depreciation is used.
During 2023, Camia Company incurred P4,000,000 in
exploration cost for each of 15 oil wells drilled in 2023. Of the
15 well drilled in 2023, 10 were dry holes. Camia used the
successful effort method of accounting. Camia depleted
30% of the oil discovered in 2023.
2. What total amount of depreciation should be recorded in
2023?
A. 1,040,000
C. 840,000
B. 1,240,000
D. 640,000
3. What amount of exploration cost would remain on
December 31, 2023?
A. 42,000,000
C. 20,000,000
B. 14,000,000
D. 6,000,000
Numbers 4-5
On January 1, 2022, Layag Company paid P11,000,000 for
property containing natural resource of 2,000,000 tons of ore.
The present value of the estimated cost of restoring the land
after the resource is extracted is P900,000. The land will have
a value of P1,500,000 after it is restored for suitable use.
Tunnel, bunk houses and other fixed installations are
constructed at a cost of P8,000,000 and such expenditures
are charged to mine improvements. Operations began on
January 1, 2022 and resources removed totaled 600,000
tons. During 2023, a discovery was made indicating that
available resource after 2023 will totaled 1,875,000 tons.
At the beginning of 2023, additional bunk houses were
constructed in the amount of P770,000. In 2023, only 400,000
tons were mined because of a strike.
4. What amount should be recorded as depletion for 2023?
A. 3,120,000
C. 1,280,000
B. 2,850,000
D. 2,080,000
5. What amount should be recorded as depreciation for
2023?
A. 1,120,000
C. 1,600,000
B. 2,400,000
D. 1,360,000
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Numbers 6-7
On July 1, 2022, Jaireh Company, a calendar year entity,
purchased the rights to a mine. The total purchase price was
P12,000,000. The estimated reserves were 1,500,000 tons.
Jaireh expects to extract and sell 25,000 tons per month.
Jaireh purchased a new equipment on July 1, 2022. The
equipment cost P8,000,000 and had a useful life of 8 years.
However, after all the resource is removed, the equipment will
be of no use and will be sold for P500,000.
6. If sales and production conform to expectation, what is
the depletion for 2022?
A. 1,200,000
C. 1,950,000
B. 2,400,000
D. 1,400,000
7. If sales and production conform to expectation, the
depreciation of the equipment for 2022 is
A. 937,500
C. 750,000
B. 468,750
D. 500,000
Numbers 8-9
On May 31, 2022, Sidebits Company 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, 2022, 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, 2022.
8. What would be the depletion expense for the year ended
December 31, 2022?
A. 525,000
C. 153,125
B. 262,500
D. 306,250
9. What would be the depreciation expense on the new
equipment for the year ended December 31, 2022?
A. 9,000
C. 7,875
B. 4,500
D. 8,313
10. During 2023, Mimzee incurred P7,000,000 in exploration
cot for each of 15 oil wells drilled in 2023. Of the 15 wells
drilled, 10 were dry holes. The entity used the successful
effort method of accounting. The entity depleted 30% of
the oil discovered in 2023. What is the carrying amount
of the exploration asset on December 31, 2023?
A. 105,000,000
C. 35,000,000
B. 73,500,000
D. 24,500,000
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