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STUDENT HANDOUTS
FINANCIAL ACCOUNTING AND REPORTING CABARLES/SAGOT/CAYETANO
FAR.126—WASTING ASSETS 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 3. Development Cost – cost of preparing the site for
to man produced by nature. Actually, wasting assets are extraction.
natural resources. Wasting assets are sold called because
these are physically consumed and once consumed, the a. Tangible Development Cost – includes all of the
assets cannot be replaced anymore. transportation and other heavy equipment needed to
extract the resource and get it ready for market.
Initial Measurement – In general, the cost of wasting asset Tangible Development Cost are capitalized and
can be divided into four categories, namely: accounted for as Property, Plant and Equipment
under PAS 16.
1. Acquisition cost P XX
2. Exploration cost XX b. Intangible Development Cost – includes drilling
3. Development cost XX costs, tunnels, shafts, and well. Intangible
4. Restoration cost XX Development Cost are capitalized and accounted
Initial cost of wasting asset P XX for as Wasting Asset under PFRS 6.

1. Acquisition cost – is the price paid to obtain the property 4. Restoration Cost – is the cost to be incurred in order to
containing the natural resources. bring the property to its original condition. The estimated
restoration cost must be discounted (present value).
2. Exploration & evaluation cost – is the expenditure
incurred before the technical feasibility and commercial Depletion – The removal, extraction or exhaustion of a
viability of extracting a mineral resource are natural resource is called depletion. It is the systematic
demonstrated. Simply stated, it is the cost to locate the allocation of the depletable amount of a wasting asset over
natural resource. the period the natural resource is extracted or produced.
Depletion charge for each period shall form part of
Example of exploration and evaluation: inventory.
a. Acquisition of rights to explore
b. Topographical, geological, geochemical and 1ST – Initial cost of wasting asset:
geophysical studies Acquisition cost P XX
c. Exploratory drilling Exploration cost XX
d. Trenching Development cost XX
e. Sampling Restoration cost XX
f. Activities in relation to evaluating the technical Initial cost of wasting asset P XX
feasibility and commercial viability
g. General and administrative costs directly attributable 2ND – Depletable amount:
to exploration and evaluation
Initial cost of wasting asset P XX
Methods of Accounting for Exploration and Less: Residual value ( XX)
Evaluation: Depletable amount P XX

• Successful Effort Method – The exploration cost 3RD – Depletion rate:

directly related to the discovery of commercially Depletable amount P XX
producible natural resource is capitalized as cost of Divide: Total estimated output XX
the resource property. The exploration cost related Depletion rate P XX
to “dry holes” or unsuccessful discovery is expensed
in the period incurred. 4TH – Depletion:

• Full Cost Method – All exploration costs, whether Depletion rate P XX

successful or unsuccessful, are capitalized as cost of Times: Units extracted XX
the successful resource discovery. Depletion P XX

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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 P XX
Times: Units sold XX
Depletion 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 P XX
Add: Additional dev. cost XX
Less: Accumulated depletion (XX)
Carrying amt on change date P XX

2ND – New depletable amount:

Carrying amt on change date P XX
Less: New residual value ( XX)
New depletable amount P XX

3RD – New Depletion rate:

New Depletable amount P XX
Divide: Revised est. output XX
New Depletion rate 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 P XX

Add: Accumulated depletion XX
Less: Capital liquidated ( XX)
Less: Depletion unsold/unrealized ( XX)
Maximum dividend P XX

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DISCUSSION QUESTIONS

1. The cost of natural resources include: 6. In the full cost method, oil firms
I. Acquisition cost A. Are required to expense all oil-drilling costs resulting
II. Exploration costs to the extent that they are in dry holes.
capitalized in accordance with an entity’s B. Must expense drilling costs which result in
accounting policy productive oil wells.
III. Intangible development costs C. Can capitalize all oil-drilling costs.
IV. Restoration or decommissioning costs D. Shall not reduce costs below their recoverable
amounts.
A. I, II C. I, II, IV
B. I, II, III D. I, II, III, IV 7. Tangible development costs
A. Are accounted for under PFRS 6
Numbers 2-3 B. Are capitalized as cost of natural resource and
On January 1, 2020, Hilary Company purchased a mineral depreciated over the economic life of the natural
mine for P26,400,000 with removable ore estimated at resource
1,200,000 tons. After it has extracted all the ore, the entity will C. Are not capitalized as cost of natural resource but
be required by law to restore the land to the original condition capitalized as equipment and depreciated separately
at an estimated cost of P2,200,000. The present value of the D. Are development costs with no physical substance
estimated restoration cost is P1,800,000. The property can but nevertheless treated as part of wasting asset
be sold afterwards for P3,000,000. because of the application of substance over form
8. Development costs are divided into tangible equipment
During 2020, the entity incurred P2,000,000 exploration cost and intangible development costs. The intangible
and P1,600,000 development cost preparing the mine for development costs are generally considered as part of
productions. The entity removed 80,000 tons of ore and sold the depletion base while tangible equipment are normally
60,000 tons of ore in the current year. not included in the depletion base.

2. What is the depletion for the current year? I. Tangible equipment that can be moved and be used
C. 1,920,000 C. 1,940,000 from one site to another should be depreciated over
D. 1,440,000 D. 1,455,000 their useful life or the life of the wasting asset
whichever is shorter.
3. What amount of depletion should be included in cost of
II. Tangible equipment that cannot be moved and does
sales for the current year? not have alternative use (cannot be used from one
A. 1,920,000 C. 1,500,000 site to another) should be depreciated over their
B. 1,440,000 D. 1,590,000 useful life or the life of the wasting asset whichever is
shorter.
Numbers 6-7 A. True, true C. False, true
Iris Company acquired property at the beginning of current B. True, false D. False, false
year which contains mineral deposit. The acquisition cost of
the property was P20,000,000. Geological estimates 9. Double Chin Company purchased a tract of resource
indicated that 5,000,000 tons of mineral may be extracted. It land in 2020 for P39,600,000. The content of the tract
is further estimated that the property can be sold for was estimated at 1,200,000 units. When the resource has
P5,000,000 following mineral extraction. For P2,000,000, Iris been exhausted, it is estimated that the land will be worth
is legally required to restore the land to a condition P1,200,000. Fixed installations were set up at a cost of
appropriate for resale. After acquisition, the following costs P9,600,000. Mining equipment was purchased on
were incurred: January 2, 2021 for P12,400,000.
The life of the fixed installations is 8 years and the
Exploration cost 3,000,000 equipment, 4 years. In 2021, 120,000 units have been
Development cost related to drilling of wells 6,000,000 extracted. This was one half of the annual extraction
Development cost related to production 4,000,000 which can be expected following the first year of
equipment operations.
The production equipment has a useful life of 5 years and the Double Chin Company should record total depreciation
mineral property can be fully depleted in about 8 years. The for 2021 at
equipment has no alternative use. During the current year, the A. 4,060,000 C. 2,200,000
company extracted 600,000 tons of the mineral and sold B. 3,100,000 D. 960,000
450,000 tons.
10. Changes in residual value or estimated quantity of
4. What amount of depletion should be recognized for mineral reserves are
2019? A. Changes in accounting estimates accounted for
A. 3,120,000 C. 3,600,000 prospectively
B. Changes in accounting estimates accounted for
B. 2,340,000 D. 2,700,000
retrospectively
5. What amount of depreciation is recognized for 2019? C. Changes in accounting policy accounted for
A. 360,000 C. 800,000 prospectively
D. Changes in accounting policy accounted for
B. 500,000 D. 480,000
retrospectively

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11. 2Beat1 Mining Company constructed a building costing 14. What is the depletion of wasting asset and depletion
P2,800,000 on the mine property. Its estimated residual included in cost of goods sold for the year 2019?
value will not benefit the company and will be ignored for Depletion Depletion Expense
purposes of computing depreciation. The building has an A. 100,000 62,500
estimated life of 10 years. The total estimated B. 100,000 100,000
C. 112,000 70,000
recoverable units from the mine is 500,000 tons. The
D. 70,000 112,000
company’s production of the first years of operations
was: 15. The carrying amount of the natural resources as of
December 31, 2019 is
First year 100,000 tons A. 400,000 C. 467,500
Second year 100,000 tons
B. 430,000 D. 437,500
Third year Shut down, no output
Fourth year 100,000 tons 16. What is the depletion of wasting asset and depletion
included in cost of goods sold for the year 2020?
What is the depreciation for the fourth year? Depletion Depletion Expense
A. 480,000 C. 210,000 A. 125,000 150,000
B. 560,000 D. 336,000 B. 150,000 125,000
C. 140,000 168,000
12. Deepside Company purchased in 2019 a property that D. 168,000 140,000
contained mineral deposit for P4,500,000. Estimated
recovery was 1,000,000 metric tons of deposits. 17. The carrying amount of the natural resources as of
Development costs P150,000 were also incurred in the December 31, 2020 is
same year. The mining property was expected to be
A. 225,000 C. 292,000
worth P600,000 after the mineral deposits had all be
B. 305,000 D. 278,000
removed.

During 2020, the company extracted and sold 100,000 18. What is the depletion of wasting asset and depletion
metric tons of mineral. Further development costs of included in cost of goods sold for the year 2021?
P75,000 were incurred in 2021, and the estimate of total Depletion Depletion Expense
recoverable deposits (including the amount extracted in A. 187,600 160,800
2020) was revised to 925,000 metric tons. During 2021, B. 175,000 174,200
the company recovered 150,000 metric tons. C. 140,000 168,000
D. 187,600 173,300
The depletion for the year 2021 is
A. 603,658 C. 676,500
B. 618,750 D. 750,000 19. The carrying amount of the natural resources as of
December 31, 2021 is
13. Which measurement model applies to exploration and
A. 225,000 C. 317,400
evaluation assets subsequent to initial recognition?
A. The cost model C. Either A or B B. 259,400 D. 217,400
B. The revaluation model D. Recoverable amount
20. Maureen Company provided the following balances
Numbers 14-19 on December 31, 2020:
On January 2, 2019, Legend Company purchased land for
P450,000, from which it is estimated that 400,000 tons of ore
Wasting asset, at cost 40,000,000
could be extracted. It estimates that it will cost P80,000 to
restore the land, after which it could be sold for P30,000.
Accumulated depletion 15,000,000
Capital Liquidated 5,000,000
During 2019, the company mined 80,000 tons and sold Retained earnings 10,000,000
50,000 tons. During 2020, the company mined 100,000 tons Depletion based on 100,000 units 3,000,000
and sold 120,000 tons. At the beginning of 2021, the extracted at P30 per unit
company spent an additional P100,000, which increased the Inventory of resource deposit 2,000,000
reserves by 60,000 tons. In 2021, the company mined (20,000 units)
140,000 tons and sold 130,000 tons. The company uses a
FIFO cost flow assumption.
What is the maximum dividend that can be declared
on December 31, 2020?
Round off depletion rate to two (2) decimal places. A. 19,600,000 C. 25,000,000
B. 19,400,000 D. 20,000,000
/ End /

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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 straight-
line 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
/ End /