WASTING ASSET

ACTIVITIES
ANSWER KEY
Problem 1
2017
Faith Company was engaged in the rock and gravel business. The
following transactions relate to the acquisition and development of Rock and Gravel3,456,000
an extensive gravel pit: Cash 3,456,000
Year 1 acquisition & development cost 3,456,000
Estimated output 2,400,000 tons
Production 1,000,000 tons Depletion 1,440,000
Accumulated Depletion 1,440,000
Year 2 Add’l development cost 1,764,000
Production 600,000 tons
2018
Year 3 Add’l development cost 600,000
New estimate of remaining output 2,500,000 tons Rock and Gravel1,764,000
Production 700,000 tons Cash 1,764,000

Required: Prepare journal entries for year 1, year 2 and

year 3. Depletion 1,620,000
Accumulated depletion 1,620,000
3,456,000/2,400,000=1.44*1,000,000 = 1,440,000

3,456,000+1764000-1,440,000 = 3,780,000/1400,000 2019

= 2.7 per ton x 600,000
Rock and gravel 600,000
= 1,620,000 Cash 600,000
3456,000+1754,000+600,000 = 5,820,000
5,820,000-1440000-1,620,000 = 2,760,000/2,500,000
=1.104 per ton x 700,000 Depletion 772,800
= 772,800 Accumulated Depletion 772,800
Problem 2
Alpas company purchased a natural resource property for 9,000,000. The estimated output was
1,500,000 tons. Mining equipment was acquired at the cost of 14,400,000. The equipment has a
useful life of 10 years but is capable of exhausting the resource in six to eight years. Production is as
follows:
1st year 300,000 tons
2nd year 375,000 tons
3rd year None
4th year 150,000
Compute the depletion and depreciation for each of the 4 years.
  Depletion rate = (14,400,000/1,500,000) = 9.6
6 to 8 years is shorter than 10 years so use
production method
Depletion Depreciation
Year 1 9,000,000/1,500,000= 6x300,000 = 1,800,000 9.6 x 300,000 = 2,880,000
Year 2 9,000,000/1500,000 =6 x 375,000= 2,250,000 9.6 x 375,000 = 3,600,000
Year 3 = - 14400,000-2,880,000-3,600,000=7,920,000/8=990,000
Year 4 9,000,000/1500,000*150,000 = 900,000 1,500,000-675,000=825,000 tons remaining
14,400,000-2880,000-3,600,000-990,000=
6,930,000/825,000= 8.4 x 150,000=1,260,000
Exercise 1.On January 1, year 1, Kirk Company was organized Cash 10,312,500
with an authorized share capital of 18,750,000 consisting of Share Capital 9,375,000
75,000 of P250 par value, one half of which was immediately Share premium 937,500
sold for cash at 275 per share. In February, the entity acquired a  
tract of resource land at a cost of 5,625,000 which was paid in Resource property 5,625,000
cash. Also, the entity purchased for cash mining equipment of Cash 5,625,000
1,500,000. The geological survey of the resource property  
Mining Equipment 1,500,000
indicated an estimated content of 1,000,000 units. During the
Cash 1,500,000
year ended December 31 2017, the entity mined 90,000 units of
 
which 85,000 units were sold for a cash price of 125 per unit. Cash 10,625,000
 The entity paid the following during the year. Sales 10,625,000
Mining labor and other direct costs 4,252,500  
Administrative expenses 937,500 Depletion 506,250
 Required: Accumulated depletion 506,250
a. Prepare journal entries including adjustments to record the 5625,000/1,000,000=5.625*90,000=506,250
transactions.  
b. Prepare an income statement for the year ended December Mining labor & Other Costs 4,252,500
31, year 1. Administrative expenses 937,500
c. Prepare a statement of financial position on December 31, Cash 5,190,000
year 1.  
d. Compute the maximum dividend that can legally be declared Inventory 271,875
by the entity on December 31, year 1. P/L 271,875
e. Prepare journal entry assuming the maximum dividend is
declared by the entity. Depreciation 1.5M/1Mx90,000 135,000
Cash 10,312,500 B. Income statement
Share Capital 9,375,000 Sales 10,625,000
Share premium 937,500 Less: Dep’n 135,000
  Admin. exp 937,500
Resource property 5,625,000 Mining & labor cost4,252,500
Cash 5,625,000 Depletion 506,250
  Inventory (271,875) (5,559,375)
Mining Equipment 1,500,000 Net Income 5,065,625
Cash 1,500,000  C. Statement of financial position
  CA: Cash 8,622,500
Cash 10,625,000 Inventory 271,875 8,894,375
Sales 10,625,000 NCA: Resource Property 5,625,000
  Less: A/D (506,250) 5,118,750
Depletion 506,250 Mining Property 1,500,000
Accumulated depletion 506,250 Less: A/D (135,000) 1,365,000
5625,000/1,000,000=5.625*90,000=506,250 Total Assets 15,378,125
 
Mining labor & Other Costs 4,252,500 Share Capital 9,375,000
Administrative expenses 937,500 Share premium 937,500
Cash 5,190,000 R/E 5,065,625
  Total Liabilities & SHE
Inventory 271,875 15,378,125
P/L 271,875  
D. R/E 5,065,625
Depreciation 1.5M/1Mx90,000 135,000 Cap. Liquidated 478,125
Accumulated Depreciation 135,000 Dividends payable 5,543,750
Here is the computation on the maximum dividend:

RETAINED EARNINGS 5,065,625

ADD: ACCUMULATED DEPLETION 506,250
Total 5,571,875
Less: Depletion in inventory (5,000 x 5.625) 28,125
Maximum amount of dividend 5,543,750

My apology for the video discussion which I committed mistake in the

computation.
Your boyfriend seeks for your expertise regarding a work related matter. He works for Love
company engaged in a business on exploration of natural resource property. He provided
you with the following balances at the end of the current year:
Wasting asset, at cost 16,000,000
Accumulated depletion 2,000,000
Share capital 40,000,000
Capital liquidated 1,440,000
Retained earnings 1,200,000
Depletion based on 50,000 units at 16/unit 800,000
Inventory of resource deposit (5000 units) 320,000
 He is confused on the company’s declaration of dividends of 1,600,000 which is more than
its retained earnings balance. 
Retained Earnings 1,200,000
Add: Accumulated Depletion 2,000,000
Total 3,200,000
Less: Capital Liquidated 1,440,000
Inventory (depletion) 5,000 x 16 80,000 1,520,000
Maximum Dividend 1,680,000