Auditing and Assurance Specialized

Industries p5
SUBSEQUENT MEASUREMENT
After recognition, an entity applies either the
1. Cost model or
2. revaluation model to the exploration and evaluation assets
The journal entry assuming there is increase in value of wasting asset is
Wasting asset xxx
Revaluation surplus xxx
Refer to PAS 16- Property, plant and equipment and PAS 38- Intangible assets for
guidance. The classification should be consistent with the classification of the assets as
tangible or intangible depending on their nature
DEPLETION
 it refers to the systematic and rational allocation of the depletion base of a natural
resource over its useful life
DEPLETION METHOS
 units of output method (UOP) is often used in computing the depletion of a
natural resource. The formula is:
Depletion=
Total cost of the wasting asset−estimated residual value
be extracted ¿ x units extracted during the year
Units estimated ¿
Where:
Total cost of the wasting asset= Acquisition cost + exploration cost + intangible
development cost + estimated restoration cost

PROBLEM 1:
During 2021, UV Ink company acquired with mineral deposit for P15M. The property
had a residual value of P500,000. However, UV Ink legally required to restore the
property to its original condition at a discounted amount of P2,000,000. Geologist
estimate that 2,000,000 tons are to be extracted. Tons extracted totaled 250,000 in
2021.
Required:
1. What is the depletion to be recognized for 2021?
2. Prepare all the necessary entries in 2021
SOLUTION:
AC 15,000,000
RV 500,000
ERC 2,000,000
DEPLETABLE AMOUNT 16,500,000
EST. UNITS TO BE EXTRACTED(/) 2,000,000
DEPLETION RATE (/) 8.25
UNITS EXTRACTED 250,000
DEPLETION (X) 2,062,5000

JOURNAL ENTRY:
Mineral deposit 15,000,000
Cash 15,000,000

Mineral deposit 2,000,000

Asset retirement obligation 2,000,000

Depletion 2,062,5000
Acc. depletion 2,062,000

Change in the units estimated to be extracted and additional development costs

 where there is a change in the units estimated to be extracted or when the
company incurs additional costs, these are regarded as change in accounting
estimate to be handled currently and prospectively. The company needs to be
computed for the new depletion rate per unit using this formula:
Remaining depletable cost
New depletion rate/unit=
Remaining revised estimate of the productive output

Depletion= depletion rate/ unit x units of extracted during the year

PROBLEM 2:
During 2020, Macaulay company purchased property with one deposit for P10,000,000.
The property had a residual value of P1,000,000. However, Macaulay is legally required
to restore the property to its original condition at a discounted amount of P500,000 in
2020. Macaulay spend P800,000 in the development cost in 2021, an amount of
P900,000 was spent for additional development on the mine.
The tonnage mined and estimated tons for the years 2020-2021 are as follows
 YEAR TONS EXTRACTED ESTIMATED TONS
REMAINING
2020 500,000 1,500,000
2021 800,000 1,700,000

REQUIRED:
Compute for the depletion to be recognized for 2020 and 2021?

SOLUTION:
AC 10,000,000 DA-2020 10,300,000
ERC 500,000 DEPLETION-2020 2,575,000
DC 800,000 TOTAL 7,725,000
TOTAL 11,300,000 DC-2021 900,000
RV 1,000,000 DA-2021 8,625,000
DA-2020 10,300,000 EST. UNITS 2,500,000
EST. UNITS 2,000,000 DR-2021 3.45
DR-2020 5.15 ACTUAL UNITS 800,000
ACTUAL UNITS 500,000 DEPLETION-2021 2,760,000
DEPLETION-2020 2,575,000

ILLUSTRATION: CHANGE IN ESTIMATED RESTORATION COST

O January 2, 2020, Restorer Company purchase property with ore deposit for
P20,000,000. the property had a residual value of P1,000,000. However, Restorer is
required to restore the property to its original condition at an estimated cost of
P2,500,000 on December 31, 2023. The appropriate discount rate is 10%.
The tonnage mined and estimated remaining tons for years 2020-2021 are as follows.
YEAR TONS EXTRACTED ESTIMATED TONS
REMAINING
2020 500,000 1,500,000
2021 800,000 1,700,000

Required: Compute for the following and prepare the related journal entries round off
depletion rate into two decimal places and present value factor into two decimal places.
1. Cost of wasting asset

2. Depletion expense in 2020

3. Interest expense in 2020

4. Case 1: Assuming at the end of 2020 the restoration cost to be incurred on Dec.
31, 2020 is now estimated to be P2,300,000. compute for the:

a. Interest expense in 2021

b. Depletion expense in 2021
5. Case 2: Assuming at the end of 2020 the restoration cost to be incurred on Dec.
31, 2020 is now estimated to be P2,600,000. compute for the:

c. Interest expense in 2021

d. Depletion expense in 2021

SOLUTION:
AC 20,000,000
ERC (0.6830 X2.5M) 1,707,500
COST WA 21,707,500
RV 1,000,000
DA 20,707,500
EST. UNITS 2,000,000
DR 10.35%
ACTUAL UNITS 500,000
DEPLETION-2020 5,175,000

ARO 1,707,500
RATE 10%
INTEREST EXPENSE 170,750

DA 20,707,5000
DEPLETION-2020 5,175,000
TOTAL 15,532,500
DEC. IN ARO 150,260
DA-2021 15,382,240
EST. UNITS 2,500,000
DR 6.16%
ACT. UNITS 800,000
DEPLETION-2021 4,920,000

ERC 20 1,878,250
ERC (0.7513 X2.3M) 1,727,990
DEC. IN ARO 150,260