Professional Documents
Culture Documents
WASTING ASSETS
LECTURE NOTES
Key Definitions
Development Cost
Intangible
e.g. Cost of drilling and construction of wells Include in the cost of wasting asset
Tangible
e.g. Building and machinery and equipment Recognize as separate asset
Depreciation method:
Same method for other PPE
Theory
2. Which of the following depreciation methods most closely approximates the method used to deplete the cost
of natural resources?
a. Straight-line method
b. Double-declining-balance method
c. Sum-of-the-years'-digits method
d. Units-of-production method
3. Which of the following depreciation methods is computed in the same way as depletion?
a. Straight-line
b. Sum-of-the-years'-digits
c. Double-declining-balance
d. Productive-output
Problems
1. Joseph Company acquired a tract of land containing an extractable natural resource. Joseph 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 land will
have a value of $1,000,000 after restoration. Relevant cost information follows:
2. In January 2005, Vance Mining Corporation purchased a mineral mine for $7,200,000 with removable ore
estimated by geological surveys at 4,320,000 tons. The property has an estimated value of $720,000 after the ore
has been extracted. Vance incurred $2,160,000 of development costs preparing the property for the extraction
of ore. During 2005, 540,000 tons were removed and 480,000 tons were sold. For the year ended December 31,
2005, Vance should include what amount of depletion in its cost of goods sold?
a. $720,000
b. $810,000
c. $960,000
d. $1,080,000
3. In 2004, Newman Company paid $1,000,000 to purchase land containing a total estimated 160,000 tons of
extractable mineral deposits. The estimated value of the property after the mineral has been removed is
$200,000. Extraction activities began in 2005, and by the end of the year, 20,000 tons had been recovered and
sold. In 2006, geological studies indicated that the total amount of mineral deposits had been underestimated
by 25,000 tons. During 2006, 30,000 tons were extracted, and 28,000 tons were sold. What is the depletion rate
per ton (rounded to the nearest cent) in 2006?
a. $4.24
b. $4.32
c. $4.85
d. $5.19
4. In 2004, Silverspur Mining Inc. purchased land for $5,600,000 that had a natural resource supply estimated at
4,000,000 tons. When the natural resources are removed, the land has an estimated value of $640,000. The
required restoration cost for the property is estimated to be $800,000.
Development and road construction costs on the land were $560,000, and a building was constructed at a cost of
$88,000 with an estimated $8,000 salvage value when all the natural resources have been extracted.
During 2005, additional development costs of $272,000 were incurred, but additional resources were not
discovered. Production for 2004 and 2005 was 700,000 tons and 900,000 tons, respectively.
Compute the depletion charge for 2004 and 2005. (Include depreciation on the building, if any, as a depletion
charge.) Round depletion charge to the nearest cent.
ANS:
5. 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.
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,
c. respectively, were spent for additional developments on the mine.
d. The tonnage mined and estimated remaining tons for years 2005-2009 are as follows:
REQUIRED:
Compute the depletion and depreciation expense for the years 2005 – 2009.
Depletion
Year Output Rate Depletion
2005 - -
2006 1,500,000 1.20 1,800,000
2007 1,800,000 1.11 1,998,000
2008 1,700,000 1.15 1,955,000
2009 900,000 1,047,000
Computation of depletion rate - 2006
Cost of land P6,200,000
Development cost – 2005 400,000
Development cost – 2006 300,000
Total cost 6,900,000
Residual value ( 900,000)
Depletable amount 6,000,000
/Estimated reserves 5,000,000
Depletion rate 1.20
Depreciation
Year Output Rate Depreciation
2005 - -
2006 1,500,000 0.06 90,000
2007 1,800,000 0.06 108,000
2008 1,700,000 0.04 68,000
2009 900,000 34,000