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 entity’s 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.
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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
P
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
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P4,200,000 (1,998,000) 2,202,000 800,000 3,002,000 2,600,000 1.15
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PROFESSIONAL REVIEW and TRAINING CENTER, INC. 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.
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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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PROFESSIONAL REVIEW and TRAINING CENTER, INC. 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 Iba’s 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
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What is the depreciation for the fourth year? a. P490,000 c. P210,000 b. P560,000 d. P336,000
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