Chapter #13
Wasting Assets
TRUE OR FALSE
1. An entity is required to recognize exploration and evaluation expenditure as an asset when such
expenditure is recoverable in future periods. F
2. Normally, companies compute depletion on a straight-line basis. F
3. Development cost is the cost incurred in an attempt to locate the natural resource that can
economically be extracted or exploited. F
4. The undiscounted estimated restoration cost is capitalized as part of the depletable cost of a wasting
asset. F
5. The depreciation of tangible equipment used in mining operations is based on the life of the mining
equipment or the life of the wasting asset, whichever is longer. F
6. An exploration and evaluation asset shall be measured initially at cost. T
7. Intangible development costs and restoration costs are part of the depletion T
8. Wasting assets are actually natural resources, which are physically consumed and irreplaceable T
9. Depletion expense is usually an inventoriable cost. T
10. The depletable amount of the wasting asset is divided by the units estimated to be extracted to
obtain depletion rate per unit. T
MULTIPLE CHOICE-THEORIES
1. Which of following is not a similarity in the accounting treatment for depreciation and cost
depletion?
A. The estimated life is based on economic or productive life
B. Assets subject to either are reported in the same classification on the statement of financial
position.
C. The rates may be changed upon revision of the estimated productive life used in the original rate
computations.
D. Both depreciation and depletion are based on time.
2. The most common method of recording depletion for accounting purposes is
A. The operating efficiency of the asset decreases in later years.
B. the decreasing charge method.
C. the straight-line method.
D. the units-of-production method.
3. Of the following costs related to the development of natural resources, which one is not a part of
depletable cost?
A. Acquisition cost of the natural resource deposit
B. Exploration costs
C. Tangible equipment costs associated with machinery used to extract the natural resource
D. Intangible development costs such as drilling costs, tunnels, and shafts
4. Does PFRS 6 require an entity to recognize exploration and evaluation expenditure as assets?
A. Yes, but only to the extent such expenditure is recoverable in future periods.
B. Yes, but only to the extent the technical feasibility and commercial viability of extracting the
associated mineral resource have been demonstrated.
C. Yes, but only to the extent required by the entity’s accounting policy for recognizing exploration
and evaluation assets.
D. No, such expenditure is always expensed in profit or loss as incurred.
5. PFRS 6 applies to expenditures incurred
A. When searching for an area that may warrant detailed exploration, even though the entity has
not yet obtained the legal rights to explore a specific area.
B. When the legal rights to explore a specific area have been obtained, but the technical feasibility
and commercial viability of extracting a mineral resource are not yet demonstrable.
C. When a specific area is being developed and preparations for commercial extraction are being
made.
D. In extracting mineral resources and processing the resource to make it marketable or
transportable.
6. Which of the following expenditures would never qualify as an exploration and evaluation asset?
A. Expenditure for acquisition of rights to explore.
B. Expenditure for exploratory drilling.
C. Expenditures related to the development of mineral resources.
D. Expenditure for activities in relation to evaluating the technical feasibility and commercial
viability of extracting a mineral resource.
7. Which of the following is not a difference between the accounting treatment for depreciation and
cost depletion?
A. Depletion applies to natural resources while depreciation applies to plant and equipment.
B. Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers
to the wear, tear, and obsolescence of the asset
C. Many formulas are used in computing depreciation but only one is used to any extent in
computing depletion.
D. The cost of the asset is the starting point from which computation of the amount of the periodic
charge is made to operations for depreciation, but the fair value reassessed each year is the
starting point for the periodic charge for depletion.
8. What is an entity required to consider in developing accounting policies for exploration and
evaluation activities?
A. The requirements and guidance in Standards and Interpretations dealing with similar and
related issues.
B. The definitions, recognition criteria, and measurement concepts for assets, liabilities, income,
and expenses in the Framework.
C. Recent pronouncements of standard-setting bodies, accounting literature, and accepted industry
practices.
D. Whether the accounting policy results in information that is relevant and reliable.
9. Is an entity ever required or permitted to change its accounting policy for exploration and evaluation
expenditures?
A. Yes, entities are required to change their accounting policy for these expenditures if the change
would result in more useful information for users of financial statements.
B. Yes, entities are free to change accounting policy for these expenditures as long as the selected
policy results in information that is relevant and reliable.
C. Yes, but only if the change makes the financial statements more relevant to the economic
decision-making needs of users and no less reliable, or more reliable and no less relevant to
those needs.
D. No, entities would be permitted to change accounting policy only on adoption of a new or revised
Standard that replaces the existing requirements in IFRS 6.
10. Which measurement model applies to exploration and evaluation assets subsequent to initial
recognition?
A. The cost model
B. The revaluation model
C. Either the cost model or the revaluation model
D. The recoverable amount model
11. Which of the following facts or circumstances would not trigger a need to test an evaluation and
exploration asset for impairment?
A. The expiration—or expected expiration in the near future—of the period for which the entity has
the right to explore in the specific area, unless the right is expected to be renewed.
B. The absence of budgeted or planned substantive expenditure on further exploration and
evaluation activities in the specific area.
C. A decision to discontinue exploration and evaluation activities in the specific area when those
activities have not led to the discovery of commercially viable quantities of mineral resources.
D. Lack of sufficient data to determine whether the carrying amount of the exploration and
evaluation asset is likely to be recovered in full from successful development or by sale.
12. Which of the following is not a disclosure required by PFRS 6?
A. Information about commercial reserve quantities.
B. Accounting policies for exploration and evaluation expenditures, including the recognition of
exploration and evaluation assets.
C. The amounts of assets, liabilities, income and expense, and operating and investing cash flows
arising from the exploration for and evaluation of mineral resources.
D. Information that identifies and explains the amounts recognized in the financial statements
arising from the exploration for and evaluation of mineral resources
13. During year 2, Megumi Co. increased the estimated quantity of copper recoverable from its mine.
Megumi uses the units of production depletion method. As a result of the change, which of the
following should be reported in Megumi's year 2 financial statements?
Cumulative Effect of a Change Pro-forma Effects on Retroactive
in Accounting Principle Applications of New Depletion Base
A. Yes Yes
B. Yes No
C. No No
D. No Yes
MULTIPLE CHOICE – PROBLEMS
A. Diamond Company acquired a tract of land containing an extractable natural resource. Diamond
Company is required by the purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological surveys estimate that the
recoverable reserves will be 2,500,000 tons and that the extraction will be completed in five years.
Relevant data follow:
Land P9,000,000
Exploration and development costs 1,000,000
Expected cash flows for restoration costs 1,500,000
Credit-adjusted risk-free interest rate 10%
Present value of 1 at 10% for 5 periods 0.62
What should be the depletion charge per ton of extracted material?
A. P4.37
B. P4.00
C. P3.97
D. P3.60
B. On January 1, 2020, Sapphire Mining Company purchased land with valuable natural ore deposits for
P20 million. At that time, the estimated recoverable output from the mine is 4 million metric tons of
ore after which the land is expected to a residual value of P3 million. To facilitate the extraction and
transportation of the ore, roads were constructed amounting to P1.5 million.
In 2020, two million metric tons were mined. At the end of 2021, a new estimate of remaining
recoverable ore indicated 2.5 million metric tons are available. During 2021, 1.5 million metric tons
were mined.
How much is the depletion expense for 2020 and 2021, respectively?
A. P9,250,000 and P3,468,750
B. P9,250,000 and P5,550,000
C. P10,000,000 and P3,750,000
D. P10,000,000 and P6,000,000
C. In 2019, Pearl Company purchased property with natural resources for P28 million. The property
has a residual value of P5 million. However, the company is required to restore the property to its
original condition and this will require restoration costs of P2 million at the end of five years after
which the extraction will be completed. Credit-adjusted risk-free interest rate at this time is 10%•
(Round off present value factor to three decimal places).
In 2019, Pearl Company spent P1 million in development costs and P3 million in buildings on the
property. Pearl does not anticipate that the buildings will have utility after the natural resources are
removed. In 2020, an amount of P1.2 million was spent for additional development on the mine. The
tonnage mined and estimated remaining tons for the years 2019 to 2021 are as follows:
Tons Extracted Tons Remaining
2019 -0- 10,000,000
2020 3,000,000 7,500,000
2021 3,500,000 2,500,000
What should be the depletion charge per ton of extracted material?
A. P7,920,000; P10,815,000
B. P7,920,000; P9,275,000
C. P8,160,000; P11,095,000
D. P8,160,000; P10,815,000
D. Ametrine Mining began operations on January 4, 2021. Prior to engaging in D. exploratory and
development activities, it purchased a tract of land for P 15 million. It is estimated that this tract will
yield 480,000 tons of ore with sufficient mineral content to make mining and processing profitable. It
is estimated that 15,000 tons of ore will be unearthed in the first and last year and 30,000 tons every
year in between. The land will have a residual value ofP750,000.
The company built necessary structures and sheds on the land at a cost of It was completed in 2021
and it is estimated that these structures can serve 20 years but because they must be dismantled if
they are moved, they have no scrap value. The company does not intend to use the structures
elsewhere.
For the year 2021, how much should Ametrine Mining report as depreciation expense relating to the
said structures and shed?
A. P112,500
B. P180,000
C. P211,760
D. P225,000
E. The following transactions occurred on January 1, 2021:
Purchased the rights to a mine for P10,000,000 of which P 1,000,000 is allocable to the
land. Estimated reserves were 1,080,000 tons and 15,000 tons are expected to be
extracted and sold per month.
Acquired an 8-year life mining equipment for P3,340,000
If the mining equipment would be of no use after the mining operations and could be sold for
PIOO,OOO, how much depreciation should be recognized in 2021.
A. P405,000
B. P450,000
C. P504,000
D. P540,000
F. Ruby Corporation acquires a coal mine at a cost of P 1,500,000. Intangible development costs total
P360,000. After extraction has occurred, Ruby must restore the property (estimated fair value of the
obligation is P 180,000), after which it can be sold for P510,000. Ruby estimates that 5,000 tons of
coal can be extracted.
If 900 tons are extracted the first year, which of the following would be included in the journal entry
to record depletion?
A. Debit to Accumulated Depletion for P275,400
B. Debit to Inventory for P275,400
C. Credit to Inventory for P270,OOO
D. Credit to Accumulated Depletion for P459,OOO
G. In 2014, Alexandrite Company purchased a tract of land as a possible future plant site. In January 18,
2022, valuable sulphur deposits were discovered on adjoining property and Alexandrite Company
immediately began explorations on its property. In December 31, 2022, after incurring P800,000 in
exploration costs, which were accumulated in an expense account, Alexandrite discovered sulphur
deposits appraised at P4,500,000 more than the value of the land.
To record the discovery of the deposits, Alexandrite should
A. Make no entry.
B. Debit P800,00 to an asset account
C. Debit P4,500,00 to an asset account
D. Debit P5,300,00 to an asset account
H. On January 2, 2021, Aquamarine Mining Co.'s board of directors declared a cash dividend of
P400,000 to stockholders of record on January 18, 2021, payable on February 10, 2021. The dividend
is permissible under law in Aquamarine's state of incorporation. Selected data from Aquamarine's
December 31, 2020 statement of financial position are as follows:
Accumulated depletion — P 100,000 Capital stock — P500,000
Additional paid-in capital — P 150,000 Retained earnings — P300,000
The P400,OOO dividend includes a liquidating dividend of
A. PO.
B. PIOO,OOO.
C. P150,OOO.
D. P300,OOO.
