Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2910 - Wasting Assets OCTOBER 2020

DISCUSSION PROBLEMS
LECTURE NOTES: The entity’s policy is to recognize exploration assets and
measure them initially at cost.
In accordance with PFRS6, at what amount should
exploration and evaluation assets be initially recognized
in the financial statements of the entity?
a. P480 million c. P200 million
b. P400 million d. P197 million

4. An exploration and evaluation asset shall no longer be

classified as such when
a. The technical feasibility and commercial viability of
extracting a mineral resource are not clear.
b. The technical feasibility and commercial viability of
extracting a mineral resource are demonstrable.
c. The exploration and evaluation assets are
1. In relation to mining activities, ‘exploration’ means
impaired.
a. The search for resources suitable for commercial
d. The exploration and evaluation assets are
exploitation.
revalued.
b. Determining the technical feasibility and
commercial viability of a mineral resource.
5. Which statement is incorrect regarding presentation of
c. Establishing access to and commissioning facilities
exploration and evaluation assets?
to extract, treat and transport production from the
a. An entity shall classify exploration and evaluation
mineral reserve, and other preparations for
assets as tangible or intangible according to the
commercial production.
nature of the assets acquired and apply the
d. The day-to-day activities of obtaining a saleable
classification consistently.
product from the mineral reserve on a commercial
b. Some exploration and evaluation assets are
scale.
treated as intangible (eg drilling rights), whereas
others are tangible (eg vehicles and drilling rigs).
2. Does PFRS 6 require an entity to recognize exploration
c. To the extent that a tangible asset is consumed in
and evaluation expenditures as assets?
developing an intangible asset, the amount
a. Yes, but only to the extent such expenditure is
reflecting that consumption is part of the cost of
recoverable in future periods
the intangible asset.
b. Yes, but only to the extent the technical feasibility
d. Using a tangible asset to develop an intangible
and commercial viability of extracting the
asset changes a tangible asset into an intangible
associated mineral resource have been
asset.
demonstrated
c. Yes, but only to the extent required by the entity’s
6. The Macau Company is involved in the exploration for
accounting policy for recognizing exploration and
mineral resources. Its policy is to recognize exploration
evaluation assets
assets and measure them initially at cost.
d. No, such expenditure is always expensed in profit
or loss as incurred The following amounts were extracted from Macau's
financial statements:
3. An entity is involved in the exploration of mineral Million
resources. It incurred the following expenditures: Trenching and sampling expenditure P100
Million Drilling rigs used for exploration,
Conducting topographical, geological, carrying amount 200
geochemical and geophysical studies P 30 Drilling rigs used for exploration,
Constructing roads and tunnels 200 depreciation expense 30
Determining volume and grade of deposits 10 In accordance with PFRS6 Exploration for and evaluation
Exploratory drilling 50 of mineral resources, at what amount should intangible
Examining and testing extraction methods exploration assets be initially recognized at in the
and metallurgical or treatment 5 financial statements of Macau?
processes a. P100 million c. P300 million
Other expenditures relating to the b. P130 million d. Nil
subsequent development of the 300
resources 7. Which measurement model applies to exploration and
Permanent excavations 80 evaluation assets subsequent to initial recognition?
Researching and analyzing an area’s a. The cost model
historic exploration data 12 b. The revaluation model
Surveying transportation and infrastructure c. Either the cost model or the revaluation model
requirements, and conducting market d. The recoverable amount model
and finance studies 3
Trenching and sampling 90

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EXCEL PROFESSIONAL SERVICES, INC.
8. Which statement is incorrect regarding disclosure of
information regarding exploration and evaluation of
mineral resources?
a. An entity shall disclose information that identifies
and explains the amounts recognized in its
financial statements arising from the exploration
for and evaluation of mineral resources.
b. An entity shall make the disclosures required by
PAS 16 for tangible exploration and evaluation
assets.
c. An entity shall make the disclosures required by
PAS 38 for intangible exploration and evaluation
assets.
d. An entity shall treat exploration and evaluation
assets as an addition to property, plant and
equipment or intangible assets.
9. Which of the following is not a disclosure required by
PFRS 6?
a. Accounting policies for exploration and accounting
expenditures, including the recognition of
exploration and evaluation assets.
b. The amounts of assets, liabilities, income and
expense, and operating and investing cash flows
arising from the exploration for and evaluation of
mineral resources.
c. Information that identifies and explains the
amount recognized in the financial statements
arising from the exploration for and evaluation of
mineral resources.
d. Information about commercial reserve qualities.
10. The most common method of recording depletion for
accounting purposes is the
a. Percentage depletion method.
b. Diminishing-charge method.
c. Straight-line method.
d. Units-of-production method.
11. Zambales Company acquired property in 2020 which
contains mineral deposit. The acquisition cost of the
property was P20,000,000. After acquisition, the
following costs were incurred:
Exploration cost P13,000,000
Development cost related to drilling
of wells 10,000,000
Development cost related to
production equipment 15,000,000
For P2,000,000, Zambales is legally required to restore
the land to a condition appropriate for resale. It is
estimated that the property can be sold for P5,000,000
following mineral extraction. Geological estimates
indicate that 5,000,000 tons of mineral may be
extracted.
The company extracted 600,000 tons of the mineral in
2020 and sold 450,000 tons. In the 2020 income
statement, what amount of depletion is included in
cost of sales?
a. P4,800,000 c. P3,600,000
b. P5,400,000 d. P4,050,000
12. Depletion expense
a. Includes tangible equipment costs in the depletion
base.
b. Excludes intangible development costs from the
depletion base.
c. Excludes restoration costs from the depletion base.
d. Is usually part of cost of goods sold.
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13. Which statement is incorrect regarding the successful
efforts method of accounting for exploration and
evaluation expenditures in the oil and gas industry?
a. Costs incurred in finding, acquiring and developing
reserves are typically capitalized on a field-by-field
basis.
b. Failure to discover commercially viable reserves
means that the expenditure is charged to expense.
c. Capitalized costs are depleted on a field-by-field
basis as production occurs.
d. Generally results in a greater deferral of costs
during exploration and development and higher
subsequent depletion charges.
14. Which statement is incorrect regarding the full cost
method of accounting for exploration and evaluation
expenditures in the oil and gas industry?
a. All costs incurred in searching for, acquiring and
developing the reserves in a large geographic cost
center or pool are capitalized.
b. The cost pools are typically depleted on a country
basis as production occurs.
c. If exploration efforts in the country or the
geological formation are wholly unsuccessful, the
costs are expensed.
d. Is no longer allowed under PFRS 6.
15. During 2020, Sitar Oil Corporation incurred P4,000,000
in exploration costs for each of 15 oil wells drilled in
2020. Of the 15 wells drilled, 10 were dry holes. Sitar
uses the successful efforts method of accounting.
Assuming that Sitar depletes 30% of the oil discovered
in 2020, what amount of these exploration costs would
remain in its December 31, 2020 statement of financial
position?
a. P6 million c. P20 million
b. P14 million d. P42 million
16. In January 2020, Rangoon Mine Co. purchased a
mineral mine for P2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all
the ore, Rangoon Mine will be required by law to
restore the land to its original condition at an
estimated cost of P220,000. The present value of the
estimated restoration costs is P180,000. Rangoon
Mine believes it will be able to sell the property
afterwards for P300,000. During 2020, Rangoon Mine
incurred P360,000 of development costs preparing the
mine for production and removed and sold 60,000 tons
of ore.
In its 2020 statement of comprehensive income, what
amount should Rangoon Mine report as depletion?
a. P135,000 c. P150,000
b. P144,000 d. P159,000
17. IFRIC 20 deals with
a. Exploration for and evaluation of mineral resources
b. Development of natural resources
c. Changes to existing restoration, decommissioning
and similar liabilities.
d. Stripping costs in the production phase of a surface
mine.
18. In accordance with IFRIC 20, “stripping” means
a. 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.
b. Determination of the technical feasibility and
commercial viability of extracting the mineral
resource.
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EXCEL PROFESSIONAL SERVICES, INC.
c. Removal of mine waste materials (“overburden”)
to gain access to mineral ore deposits.
d. Extraction of mineral ore deposits.
19. In accordance with IFRIC 20, production stripping
costs shall be accounted for
a. In accordance with the principles of PAS 2.
b. As stripping activity asset.
c. As expenses when incurred.
d. Any of these.
20. Which is incorrect regarding recognition of production
stripping costs as an asset in accordance with IFRIC
20?
a. To the extent that the benefit from the stripping
activity is realized in the form of inventory
produced, the entity shall account for the costs of
that stripping activity in accordance with the
principles of PAS 2 Inventories.
b. To the extent the benefit is improved access to
ore, the entity shall recognize these costs as a
non-current asset, if the criteria are met.
c. IFRIC 20 refers to the non-current asset as the
‘stripping activity asset’.
d. The stripping activity asset shall be accounted for
as a separate asset.
21. An entity shall recognize a stripping activity asset if,
and only if:
a. It is probable that the future economic benefit
(improved access to the ore body) associated with
the stripping activity will flow to the entity.
b. The entity can identify the component of the ore
body for which access has been improved.
c. The costs relating to the stripping activity
associated with that component can be measured
reliably.
d. All of these.
22. Which statement is incorrect regarding stripping
activity asset?
a. The nature of this existing asset will determine
whether the entity shall classify the stripping
activity asset as tangible or intangible.
b. The entity shall initially measure the stripping
activity asset at cost
c. After initial recognition, the stripping activity asset
shall be carried in the same way as the existing
asset of which it is a part.
d. The stripping activity asset shall be depreciated or
amortized on a straight-line basis.
23. In 2018, Lepanto Mining Company purchased property
with natural resources for P28,000,000. The property
had a residual value of P5,000,000. However, the
company is required to restore the property to its
original condition for P2,000,000.
In 2018, Lepanto spent P1,000,000 in development
costs and P3,000,000 in buildings on the property.
Lepanto does not anticipate that the buildings will have
utility after the natural resources are removed. In
2019, an amount of P1,000,000 was spent for
additional development on the mine. The tonnage
mined and estimated remaining tons for years 2018 to
2020 are as follows:
Tons extracted Tons remaining
2018 0 10,000,000
2019 3,000,000 7,000,000
2020 3,500,000 2,000,000
The company should recognize depletion for 2020 at
a. P10,150,000 c. P14,245,000
b. P12,040,000 d. P 9,450,000
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24. Masinloc Company purchased a tract of resource land
in 2019 for P39,600,000. The content of the tract was
estimated at 1,200,000 units. When the resource has
been exhausted, it is estimated that the land will be
worth P1,200,000. Fixed installations were set up at a
cost of P9,600,000. Mining equipment was purchased
on January 2, 2020 for P12,400,000. The life of the
fixed installations is 8 years and the equipment, 4
years. In 2020, 120,000 units have been extracted.
This was one half of the annual extraction which can
be expected following the first year of operations.
Masinloc Company should record total depreciation for
2020 at
a. P4,060,000 c. P2,200,000
b. P3,100,000 d. P 960,000
25. Leyte Company constructed a building costing
P15,000,000 on a mine property. The building has an
estimated life of 6 years with no salvage value. After
all the resource is removed expectedly over 5 years,
the building will be of no use. The estimated
recoverable output from the mine is 1,000,000 tons.
During the first year, Leyte produced 200,000 tons but
there was shut down and no output in the second year.
In the third year, Leyte resumed operations and
produced 300,000 tons.
Leyte Company should record depreciation of the
building in the third year at
a. P3,000,000 c. P3,600,000
b. P2,500,000 d. P4,500,000
26. 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.
27. Dividends representing a return of capital to
shareholders are not uncommon among companies
which
a. Use accelerated depreciation methods.
b. Use straight-line depreciation methods.
c. Recognize both functional and physical factors in
depreciation.
d. Do not expect to purchase additional property after
depleting existing property.
28. ABC Company provides the following balances at the
end of 2020:
Wasting asset, at cost P80,000,000
Accumulated depletion 20,000,000
Retained earnings 10,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units
extracted at P50 per unit 5,000,000
Inventory of resource deposit
(20,000 units) 2,000,000
Compute for the maximum amount of dividend that
ABC can declare on December 31, 2020.
a. P20,000,000 c. P15,000,000
b. P14,000,000 d. P13,000,000
- now do the DIY drill -
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EXCEL PROFESSIONAL SERVICES, INC.
DO-IT-YOURSELF (DIY) DRILL
1. PFRS6 Exploration for and evaluation of mineral
resources applies to expenditures incurred
a. Before the exploration for and evaluation of
mineral resources, such as expenditures incurred
before the entity has obtained the legal rights to
explore a specific area.
b. After the technical feasibility and commercial
viability of extracting a mineral resource are
demonstrable.
c. Both a and b
d. Neither a nor b
2. PFRS6 Exploration for and evaluation of mineral
resources applies to expenditures incurred in
a. The extraction and processing of mineral resources
for transport to market.
b. The commercial review of possible areas for mineral
extraction before bidding for the legal rights to
explore a specific area.
c. Both a and b
d. Neither a nor b
3. 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,
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
information that is relevant and reliable
4. 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
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 PFRS 6.
5. During 2020, Bolton Corporation acquired a mineral
mine for P1,500,000 of which P200,000 was ascribed
to land value after the mineral has been removed.
Geological surveys have indicated that 10 million units
of the mineral could be extracted. During 2020,
2,000,000 units were extracted and 1,600,000 units
were sold. What is the amount of depletion expensed
for 2020?
a. P300,000 c. P240,000
b. P208,000 d. P260,000
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6. On July 1, 2020, Iba Mining Company, a calendar-year
corporation, purchased the rights to a copper mine. Of
the total purchase price, P2,800,000 was appropriately
allocable to copper. Estimated reserves were 800,000
tons of copper. Iba expects to extract and sell 10,000
tons of copper per month. Production began
immediately. The selling price is P2,500 per ton. If
sales and production conform to expectations, what is
Iba’s depletion expense on this mine for financial
accounting purposes for the calendar year 2020?
a. P 35,000 c. P410,000
b. P210,000 d. P 0
7. An oil company using the successful-efforts method
drilled two wells. The first, a dry hole, cost P50,000.
The second cost P100,000 and had estimated
recoverable reserves of 25,000 barrels, of which
10,000 were sold this year. What will be the total
expense for the year related to the exploration and
production from these two wells?
a. P40,000 c. P 90,000
b. P60,000 d. P150,000
8. Yakal Exploration Co. purchased in 2018 a property
that contained mineral deposit for P4,500,000.
Estimated recovery was 1,000,000 metric tons of
deposits. Development costs P150,000 were also
incurred in the same year. The mining property was
and expected to be worth P600,000 after the mineral
deposits had all be removed. During 2019, the
company extracted and sold 100,000 metric tons of
minerals. Further development costs of P75,000 were
incurred in 2020, and the estimate of total recoverable
deposits (including the amount extracted in 2019) was
in revised to 925,000 metric tons. During 2020, the
company recovered 150,000 metric tons.
The depletion for the year 2020 is
a. P603,658 c. P676,500
b. P618,750 d. P750,000
9. On July 1, 2020 Cabangan Company purchased rights
to a mine. The total purchase price was P50,000,000
of which P5,000,000 was allocated to the land.
Estimated reserves were 6,000,000. Cabangan
expects to extract and sell 100,000 tons per month.
Cabangan Company purchased new equipment on July
1, 2020 for P21,000,000 with estimated life of 8 years.
However, after all the resource is removed, the
equipment will be of no use and will be sold for
P3,000,000. What is the depreciation of the
equipment for 2020?
a. P1,800,000 c. P2,100,000
b. P1,125,000 d. P3,600,000
10. Which statement is incorrect regarding accounting for
development expenditures in the oil and gas industry?
a. Development expenditures are costs incurred to
obtain access to proved reserves and to provide
facilities for extracting, treating, gathering and
storing the oil and gas.
b. An entity should develop an accounting policy for
development expenditure based on the guidance in
PAS 16, PAS 38 and the Framework.
c. Development expenditures are capitalized to the
extent that they are necessary to bring the
property to commercial production.
d. Most development expenditures do not result in
asset recognition.
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FAR.2910