AUDITING CONCEPTS AND APPLICATIONS1
Module 7.2_Wasting Assets (Investment in Mineral Resources
LECTURE NOTES
Costs of Wasting Assets
• Acquisition
• Exploration and evaluation
• Development
• Restoration
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.
Methods used before PFRS 6
Successful effort method
Cost of successful exploration – Capitalized
Cost of unsuccessful exploration – Expensed
Successful – The technical feasibility and commercial
viability of extracting a mineral resource are demonstrable
Full cost method
All exploration and evaluation expenditures are capitalized
Key Definitions
Exploration for and evaluation of mineral resources
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.
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
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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.
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
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
If the problem is silent
Useful life > Life of WA – Output
Useful life < Life of WA – Straight line
Estimated Restoration Cost
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
P1.907
 LEARNING EXERCISES-ILLUSTRATIVE PROBLEMS
1. Zambales Company acquired property in 2022 which Assuming that the appropriate interest rate is 8%, the
contains mineral deposit. The acquisition cost of the cost of the nuclear waste repository site is
property was P20,000,000. Geological estimates a. P606,384 c. P659,500
indicate that 5,000,000 tons of mineral may be b. P156,072 d. P500,000
extracted. It is further estimated that the property can P12-56, Skousen 15th ed
be sold for P5,000,000 following mineral extraction.
For P2,000,000, Zambales is legally required to restore 5. Botolan Company quaries limestone, crushes it and
the land to a condition appropriate for resale. After sells it to be used in road building. Botolan paid
acquisition, the following costs were incurred: P20,000,000 for a certain quarry on January 1, 2021.
The property can be sold for P4,000,000 after
Exploration cost P13,000,000
production ceases. The original total estimated
Development cost related to drilling
reserves totaled 5,000,000 tons. Botolan quarried
of wells 10,000,000
500,000 tons in 2021 and 1,500,000 tons in 2022. An
Development cost related to
engineering study performed in 2022 indicated that as
production equipment 15,000,000
of December 31, 2022, 4,500,000 tons were available.
The company extracted 600,000 tons of the mineral in Botolan Company should record 2022 depletion at
2022 and sold 450,000 tons. In the 2022 income a. P3,600,000 c. P4,800,000
statement, what amount of depletion is included in b. P6,000,000 d. P4,500,000
cost of sales?
a. P4,800,000 c. P3,600,000 6. In 2020, Lepanto Mining Company purchased property
b. P5,400,000 d. P4,050,000 with natural resources for P28,000,000. The property
had a residual value of P5,000,000. However, the
2. Natural, Incorporated embarked on a new venture in company is required to restore the property to its
Northern Luzon in 2022. It expects to glean 2,000,000 original condition for P2,000,000.
ounces of a precious ore from its holdings there, over
In 2020, Lepanto spent P1,000,000 in development
several years. Relevant data follow:
costs and P3,000,000 in buildings on the property.
Cost of the Mineral Rights P 500,000 Lepanto does not anticipate that the buildings will have
Exploration Cost, 2022 utility after the natural resources are removed. In
(1/3 successful) 1,500,000 2021, an amount of P1,000,000 was spent for
Extraction Cost, 2022 2,000,000 additional development on the mine. The tonnage
Ore extracted, 2022 500,000 oz. mined and estimated remaining tons for years 2020 to
Ore sold, 2022 300,000 oz. 2022 are as follows:

What is the depletion for 2022, using the successful Tons extracted Tons remaining
efforts method of accounting for exploration costs? 2020 0 10,000,000
a. P350,000 c. P250,000 2021 3,000,000 7,000,000
b. P300,000 d. P150,000 2022 3,500,000 2,000,000
The company should recognize depletion for 2022 at
3. On January 1, 2022, Major Company purchased a
a. P10,150,000 c. P14,245,000
uranium mine for P800,000. On that date, Major
b. P12,040,000 d. P 9,450,000
estimated that the mine contained 1,000 tons of ore.
At the end of the productive years of the mine, Major
7. Masinloc Company purchased a tract of resource land
Company will be required to spend P4,200,000 to clean
in 2021 for P39,600,000. The content of the tract was
up the mine site. The appropriate discount rate is 8%,
estimated at 1,200,000 units. When the resource has
and it is estimated that it will take approximately 14
been exhausted, it is estimated that the land will be
years to mine all of the ore. Major uses the
worth P1,200,000. Fixed installations were set up at a
productive-output method of depreciation. During
cost of P9,600,000. Mining equipment was purchased
2022, Major extracted 100 tons of ore from the mine.
on January 2, 2022 for P12,400,000. The life of the
Compute the amount of depletion for 2022.
fixed installations is 8 years and the equipment, 4
a. P114,408 c. P223,000
years. In 2022, 120,000 units have been extracted.
b. P 80,000 d. P500,000
This was one half of the annual extraction which can
E13-31 Skousen 15th ed
be expected following the first year of operations.
4. Burns Company has purchased land that will serve as a Masinloc Company should record total depreciation for
temporary .repository for nuclear waste. The site will 2022 at
function for 30 years, at which time Burns will be a. P4,060,000 c. P2,200,000
required to completely decontaminate the land. The b. P3,100,000 d. P 960,000
purchase price for the land is P500,000. Burns knows
that the land will have to be decontaminated but isn't 8. Leyte Company constructed a building costing
sure which of several possible approaches will be P15,000,000 on a mine property. The building has an
sufficient to reach the level of decontamination estimated life of 6 years with no salvage value. After
necessary by law. The costs of each approach, and the all the resource is removed expectedly over 5 years,
estimated probability that the approach will be the one the building will be of no use. The estimated
used, follow: recoverable output from the mine is 1,000,000 tons.
Approach 1 - 10% probability of total decontamination During the first year, Leyte produced 200,000 tons but
cost of P5,000 at the end of 30 years. there was shut down and no output in the second year.
Approach 2 - 20% probability of total decontamination In the third year, Leyte resumed operations and
cost of P100,000 at the end of 30 years. produced 300,000 tons. Leyte Company should record
Approach 3 - 70% probability of total decontamination depreciation of the building in the third year at
cost of P1,500,000 at the end of 30 years. a. P3,000,000 c. P3,600,000
b. P2,500,000 d. P4,500,000

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9. ABC Company provides the following balances at the (20,000 units) 2,000,000
end of 2022:
Compute for the maximum amount of dividend that
Wasting asset, at cost P80,000,000 ABC can declare on December 31, 2022.
Accumulated depletion 20,000,000 a. P20,000,000 c. P15,000,000
Retained earnings 10,000,000 b. P14,000,000 d. P13,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units -Answer your Performance Assessment 5 now-
extracted at P50 per unit 5,000,000
Inventory of resource deposit
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FINAL TERM QUIZ 3

Intangible Assets, Investment Property & Mineral Resources
Instructions: Answer the following independent problems. Submit your answers to the google form to be uploaded in
Bigsky. Take note of the submission dead-lines (gform submission and posting of proof of submission in the designated
drop box).

1. During 2022, Bolton Corporation acquired a mineral Use the following information for the next two questions.
mine for P1,500,000 of which P200,000 was ascribed
The APPLE MINING Co. on May 31, 2022, acquired the
to land value after the mineral has been removed.
rights to a coal mine containing an estimated reserves of
Geological surveys have indicated that 10 million units
1,000,000 tons of coal. The company estimated that
of the mineral could be extracted. During 2022,
12,500 tons of coal would be extracted and sold each
2,000,000 units were extracted and 1,600,000 units
month. Cost allocable to coal was P3,500,000.
were sold. What is the amount of depletion expensed
for 2022?
Also on May 31, 2022, the company purchased an
a. P300,000 c. P240,000
equipment to be used in the production, costing P95,000
b. P208,000 d. P260,000
which has an estimated useful life of 10 years. The
equipment was expected to become obsolete after all the
2. On July 1, 2022, Iba Mining Company, a calendar-year
coal deposits had been extracted from the mine and only
corporation, purchased the rights to a copper mine. Of
P5,000 selling price of the equipment could be expected.
the total purchase price, P2,800,000 was appropriately
Production was in full blast since June 1, 2022.
allocable to copper. Estimated reserves were 800,000
tons of copper. Iba expects to extract and sell 10,000
5. What would be the depletion expense for the year
tons of copper per month. Production began
ended December 31, 2022?
immediately. The selling price is P2,500 per ton. If
a. P525,000 c. P153,125
sales and production conform to expectations, what is
b. P262,500 d. P306,250
Iba’s depletion expense on this mine for financial
accounting purposes for the calendar year 2022?
6. What would be the depreciation expense on the new
a. P 35,000 c. P410,000
equipment for the year ended December 31, 2022?
b. P210,000 d. P 0
a. P9,000 c. P7,875
b. P4,500 d. P8,313
3. An oil company using the successful-efforts method
drilled two wells. The first, a dry hole, cost P50,000.
7. On July 1, 2022 Cabangan Company purchased rights
The second cost P100,000 and had estimated
to a mine. The total purchase price was P50,000,000
recoverable reserves of 25,000 barrels, of which
of which P5,000,000 was allocated to the land.
10,000 were sold this year. What will be the total
Estimated reserves were 6,000,000. Cabangan
expense for the year related to the exploration and
expects to extract and sell 100,000 tons per month.
production from these two wells?
Cabangan Company purchased new equipment on July
a. P40,000 c. P 90,000
1, 2022 for P21,000,000 with estimated life of 8 years.
b. P60,000 d. P150,000
However, after all the resource is removed, the
equipment will be of no use and will be sold for
4. Yakal Exploration Co. purchased in 2020 a property
P3,000,000. What is the depreciation of the
that contained mineral deposit for P4,500,000.
equipment for 2022?
Estimated recovery was P1,000,000 metric tons of
a. P1,800,000 c. P2,100,000
deposits. Development costs P150,000 were also
b. P1,125,000 d. P3,600,000
incurred in the same year. The mining property was
expected to be worth P600,000 after the mineral
8. Toledo Mining Company constructed a building costing
deposits had all be removed. During 2021, the
P2,800,000 on the mine property. Its estimated
company extracted and sold 100,000 metric tons of
residual value will not benefit the company and will be
minerals. Further development costs of P75,000 were
ignored for purposes of computing depreciation. The
incurred in 2022, and the estimate of total recoverable
building has an estimated life of 10 years. The total
deposits (including the amount extracted in 2021) was
estimated recoverable units from the mine is 500,000
revised to 925,000 metric tons. During 2022, the
tons. The company's production of the first four years
company recovered 150,000 metric tons.
of operations was:
The depletion for the year 2022 is First year 100,000 tons
a. P603,658 c. P676,500 Second year 100,000 tons
b. P618,750 d. P750,000 Third year Shut down, no output
Fourth year 100,000 tons
What is the depreciation for the fourth year?

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 a. P490,000 c. P210,000
b. P560,000 d. P336,000
Use the following information for questions 9 to 12.
Buyong, Inc. completed the construction of a building at
the end of 2020 for a total cost of P100 million. The
building is estimated to be economically useful for 25
years. The building was constructed for the purpose of
earning rentals under operating leases. The tenants began
occupying the building after its completion. The company
opted to use the fair value model to measure the building.
An independent valuation expert was used by the company
to estimate the fair value of the building on an annual
basis. According to the expert the fair values of the
building at the end of 2020, 2021 and 2022 were P104
million, P118 million and 116 million, respectively.
The company’s business expanded in 2021. As a result,
the company started to use the building in its operations
on January 1, 2022. Because of the change in use, the
company reclassified the building from investment
property to property, plant and equipment.
9. How much should be recognized in profit or loss in
2020 as a result of the completion of the building at
the end of 2020?
a. P18,000,000 c. P4,000,000
b. P16,000,000 d. P 0
10. The depreciation expense in 2021 is
a. P4,000,000 c. P4,160,000
b. P4,720,000 d. P 0
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14. Laguna Company incurred P900,000 of research and
development cost to develop a product for which a
patent was granted on January 2, 2022. Legal fees
and other costs associated with the registration of the
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15. Nagcarlan Company purchased a patent on January 1,
2019, for P3,570,000. The patent was being
amortized over its remaining legal life of 15 years.
During 2022 Nagcarlan determined that the economic
benefits of the patent would not last longer than ten
years from the date of acquisition. What amount
should be reported in the statement of financial
position as patent, net of accumulated amortization, at
December 31, 2022?
a. P2,618,000 c. P2,520,000
b. P2,448,000 d. P2,142,000
16. On January 1, 2022, Calamba Company signed an
agreement to operate as a franchisee of Bay Company
for an initial franchise fee of P30,000,000. Of this
amount, P10,000,000 was paid when the agreement
was signed and the balance is payable in equal annual
payment of P5,000,000 beginning December 31, 2022.
The agreement provides that the down payment is not
refundable and no future services are required of the
franchisor. Calamba’s credit rating indicates that it can
borrow money at 12% for a loan of this type.
How much is the cost of franchise?
a. P30,000,000 c. P21,541,500
b. P25,186,500 d. P19,065,000
17. Kuh Lafuh Company purchased a customer list and an
ongoing research project for a total of P400,000. Kuh
uses the expected cash flow approach for estimating
the fair value of these two intangibles. The
appropriate interest rate is 7%. The potential future
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11. How much should be recognized in profit or loss in
2021 as a result of the fair value changes?
a. P18,000,000 c. P14,000,000
b. P12,000,000 d. P 0
12. How much is the carrying amount of the building
on December 31, 2022?
a. P118,000,000 c. P113,083,333
b. P116,000,000 d. P113,280,000
13. Han, Inc. owns a building purchased on January 1,
2018 for P100 million. The building was used as
the company’s head office. The building has an
estimated useful life of 25 years. In 2022, the
company transferred its head office and decided to
lease out the old building. Tenants began
occupying the old building by the end of 2022. On
December 31, 2022, the company reclassified the
building as investment property to be carried at
fair value. The fair value on the date of
reclassification was P70 million. How much should
be recognized in the 2022 profit or loss as a result
of the transfer from owner-occupied to investment
property?
a. P14,000,000 c. P10,000,000
b. P 4,000,000 d. P 0
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patent totaled P200,000. On July 31, 2022, Laguna
paid P400,000 for legal fees in a successful defense of
the patent. The total amount capitalized for this
patent through July 31, 2022 should be
a. P1,500,000 c. P1,100,000
b. P 600,000 d. P 200,000
--------------------------------------------------------------
cash flows from the two intangibles, and their associated
probabilities, are as follows:
Customer List
Outcome 1 - 20% probability of cash flows of P50,000
at the end of each year for 5 years.
Outcome 2 - 30% probability of cash flows of P30,000
at the end of each year for 4 years.
Outcome 3 - 50% probability of cash flows of P10,000
at the end of each year for 3 years.
Ongoing Research Project
Outcome 1 - 10% probability of cash flows of P500,000
at the end of each year for 10 years.
Outcome 2 - 10% probability of cash flows of P10,000
at the end of each year for 4 years.
Outcome 3 - 80% probability of cash flows of P100 at
the end of each year for 3 years.
How much should be recognized as customer list?
a. P400,000 c. P 77,025
b. P 84,609 d. P322,975
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18. Siniloan Company incurred research and development
costs in 2022 as follows:
Equipment acquired for use in various
R&D projects P6,000,000
Depreciation on the above equipment 1,200,000
Materials used 3,000,000
Compensation costs of personnel 4,000,000
Outside consulting fees 1,500,000
Indirect costs appropriately allocated 1,300,000
 The 2022 total research and development expense Adaptation of an existing capability to a
should be particular customer’s need as part of
a. P11,000,000 c. P15,800,000 a continuing commercial activity 2,200,000
b. P 9,700,000 d. P 9,800,000
In its 2022 income statement, Biñan should report
research and development expense of
19. Biñan Company incurred the following costs during
a. P2,500,000 c. P3,200,000
2022:
b. P4,700,000 d. P5,700,000
Design of tools, jigs, molds and dies
involving new technology P2,500,000 20. Refer to Biñan Company, how much intangible
Modification of the formulation of a assets should be reporter?
process 3,200,000 a. P2,500,000 c. P2,000,000
Trouble shooting in connection of b. P3,200,000 d. P-0-
breakdowns during commercial
production 2,000,000
☺ - end - ☺

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