CHAPTER 32 DEPLETION TECHNICAL KNOWLEDGE To be aware of IFRS 6 concerning financial reporting of exploration and evaluation of mineral resources. To understand the concept of wasting assets. To understand acquisition cost, exploration cost, development cost and restoration cost in relation to wasting asset. To understand the concept of depletion. To know the proper accounting for depreciation of mining equipment. 791 yyVE J WU S$TIVACMINE MARK IFRS 6 “The obyecive ofthis standard is to specify the nancial {forthe exploration and evaluntion of mineral resources ‘Mineral rescurces include minerals, ol, natural ga and simp ‘onregenerative resources Definition ‘The term exploration and evaluation of minerat resources defined as the search for mineral resources after the entity has obtained legal right to explore in a specific area ar well ay the determination of the technical feasibibty and commercal vnabiliy of extracting the mineral resources, ‘The expenditures incurred by an entity in connection with the ‘exploration and evaluation of mineral resources before the technical feasibility and commercial viability of extracting smineral resource are known as exploration and evaluation expenditures Accordingly, expleration and evaluation expenditures do not include expenditures incurred ‘© Before an entity has obtained the legal right to explore | specie area 'b After the technical feasibility and commercial viability of extracting 4 mineral resource are demonstrable, ‘This pertains to development expenditure. Expenditures related to development of mineral resources, {or example, preparation for commercial production, such + building roads and tunnels, cannot be recognized a exploration and evaluation expenditures 1982 gxploration and evalu; ion expenditures “Acquisition of rights to explore Topographical, gel, rochemial and geophysical seudien Eeploratory driling ‘Trenching sampling ‘Aetvitios in relation to evaluating the echnical feasbity fand commercial wabiity of ecrecung a mineral resource ¢ General and- administrative coms directly attributable to exploration and evaluation activites Exploration and evaluation asset ‘The exploration and evaluation expenditures may qualif¥ as ‘exploration and evaluation asset. However, the standard does not prone a clearcut guidance {or the recognition of exploration and evaluation asset, Accordingly, an entity must develop its oun accounting policy for the recognition of such asset ‘Ava matter of fact, IFRS 6 permits an entity to continue to fpply its previous accountng policy provided that the resulting Information 1s relevont and reliable Measurement and classifi eploration and evaluation asset shall be mearured initially atcost. ‘After initial recgsiin, an entity shall apply ether the cost trodel or the revaluation model Eploration and evaluation ase i classified elther as cna ble set or an intangible ame classed For example, wehides and diig rigs would bel Hanae ce and driling rights would be classified a: intangible asset 793- VACYINE ARN Waring ats evng tr tera tin leon ae nd Reng ee aly caningtare aes Sone! mn wal i ot Pes my Sareea Wasting angets are so called because these are physically Consumed and once consumed, the assets cannot be replace] ‘anymore, ever, the wasting asets can be replaced only by the p of nature. Natural resources cannot be produced by man ‘Thus wasting aseete are characterized by two main feature: ‘2 The wasting aasets are physically consumed 1 The wasting assets are irreplaceable Cost of wasting asset ntitios follow a wide variety of practices in accounting for an centracuve industry ting tee [At present, IFRS does not addrese wasting ansets There is no comprehensive wandard th is appeabe te caren o ing nde . Toe cly andar related othe i ining indy ie IFRS ca the ‘of exploration and evaluation expenditures In general the cnt of ws eae ategonen, namely | nung eaet can be divided into four ‘Acquisition cost ition cost v8 the Acquis! Brice paid to obtain the property. ASjaining the natural resource, Unquestionably, this the tal cost of the wasting asset. Generally, the acquisition cos is charged to any descriptive Setural resource account fihere it residual and volue after the extraction ofthe natural {Reource, the portion ofthe seguiation cost appiceble tothe {ind may be included inthe natural resource account ‘Toe land may be setup in aseparate account and the remaining {ost should be charged tothe natura resource account ‘Actually, the land valu ithe eid value ofa wasting asset for purposes of computing depletion ‘Thus this shouldbe deducted from the total acquisition cost to fet the depleable amour Exploration cost jon cost is the expenditure incurred before the echnical feasibility and commercial viability of extracting & mineral resource are demonstrated. Simply stated, the exploration costs the cost incurred in art trtempt to lorle the natural resource that ean economically be extracted or exploited Exploration cost includes acqu ‘eealogical study. exploratory ling ‘The exploration may reeult in either successor failure. scquisition of right to explore, g.tenching and sampling 798 VITA HV / iM ‘MIRA I_IVACNYINF ‘Two methods of accounting for exploration cog, a. Successful effort method The exploration cost directly related 20 the dis The export productble natural reource is capita Seek rsoure reer tale ‘The exploration cost related to “ary holes” or u cee is expensed in the period incurred, hl b, Full cost method pi eae a eer eet wo Ae ci his cea coat faaasens in cyenemmels aval Persp ire doping rental ae sot re See aa The cost of driling dry holes is port of the cost productive hole vac ec Both methods are used in practice Most large and successful cil entities fllow thes et cessful efor, The full cont method is popular among small oil entities, Development cost / Development costs the cost incurred to explo or extrac th natura ‘resource that has bon cated through sucess exploration, Development cost maybe in the form le and intangible developme ent cost. ee Tangible equipment includes transportation equipment ‘machinery, tunnels, bunker and mine shaft." eee Te cf wage enpment i ont capitan ws ont are but setup ima eoparate acevo Agreed in eordace with normal depress pices Ingle! aco of mtr marr Suc tes Geing. inking ie ha Restoration cost inated restoration cts the ot to be cred inode Fg the Property tots ong endo such ctr ct ay a he ow fr a nn ee re ae PAS 16. paragraph 16, provides that the estimated cost of restoring the property to its orginal condition i= copualized ‘nly when the entity incurs the cbligation when the asset 18 seauired, In other words, the estimeted res Busting present obligation req festimated restoration cost must ration cost must be an red by law or contract. The “discounted” Depletion ‘The removal, ext called depletion tion or exhaustion of Depletion is the systematic lleation ofthe depletable amount of a wasting asset over the period the natural resource 1s extracted or produced In essence, however, depletion is recognized as the cont of the tatenal sed in production and thus becomes the Ensbed proaet lth extmctive entity sine the wasting ose 8 concnved as the total eos ofthe materials ible or production Depletion method Normally, depletion is computed using the output or production method The depeole amount of te wating ost died bythe Te sepa, clo non rate a rath maid by he ut Pa ee tool te elton forthe 191\ YONF AVIRA VA Mlustration “Avwasting asset entity bas acquired the right to use po Sepang cnnvra nour. The scqusition cota Poop {Re Plated exploration costs amount to P2,000,000, ox Stvclopment cote moured in erecting wells and druhing ‘Spon are P5000.000 Total costa ofthe wanting aeet theres ‘Sou 0 P10,00,000, eestimated that the resource deposit is approximately 1,000 Unite The dopetion rate per unit i» computed at fllowes 10,000,000 1,000,000 units Pio Depletion rate per unit = 1 250.000 units are extracted in the first year of operations, then the depletion for the year is P2,500,000, computed by ‘alupsing the production ef250(000 unite by he sae P10. i ™ “ Depletion 2,500,000 "Accumulated depletion 2,500,000 Inte income statement the depletion is classified a prt ‘the cost of production or cost of sales. mre if 4 satement of nancial pontion ie prepared at the end of the ‘first year, the wasting asset w: a separa St pear the wasting att would be thown tu 0 separate Retource depout. at cost Sconraoit cose Another method of computing d fomputing depletion is the’ siraght line method. The straight line pyro oh fn Ecctad TM eset line sepeach snot generaly favored ult to estimate the useful life of @ Es gen i timate the Useful life of 798 revision of depletion rate ot frequently, the original estimate ofthe resource deposit fas tobe changed ether beeaue pee information avaabe af geause Proluction proces have bee moe wophsiceted ‘the revision of the orginal estimate of recoverable resource {rpont give ns tothe same pote faced in sesountine for ‘hang in estimate concerning the weal fe of property. Pant Soa equpment Changes in estimate are to be handled currently and prospectively, if necessary. - ‘Accordingly, the proceure isto revise the depletion rate on 3 prospoctive bass, that is, by dividing the remaining depletable Ena of the wasting asset bythe revised estimate of the productive ‘output. Mustration ‘Asoume that, in the preceding example, aditional development ‘conte of P3,750,000 are incurred in the second year, and fecoverable deposits are estimated to be 1,250,000 units at the beginning of the second Sear ‘The depletion rate per unit forthe second year i computed as follows: Original cost of warung asset ‘Additional development tsa send year ‘Tol Accumulated depletion Remeining depletable amount 16,000,000 Depletion rte per unit (1,250,000 1.250000 sets) 1 300,000 units are extracted in the second ver, the entry to record the depletion forthe period Depletion 12.700 000 ‘Accumulated depletion (300,000 unis 3 P9) 2,200,000 799 VLA ye JaDepreciation of mining property tangible enpinent such a raneportation equipment, hey Tangle cate shaft and other eQupMENt Used in mingy sachet be reported in teparate accounts net Sara nd flowing normal deprdation policies Generally, the depreciation of equipment used in mining ‘operations is based on the useful life of the equipment or the teeful life of the waating asset, whichever is shorter. If the useful life of the equipment is shorter, the straight ling ‘method of depreciation is normally used. But if the useful life of the wasting asset is shorter, the output ‘method of deprecation is frequently used, However, if the mining equipment is movable and can be used in future extractive project, the equipment is depreciated over its useful life using the straight line method. Must ‘A natural resource deposit is estimated to contain 450,000 units Heavy equipment necessary to extract the deposit is acquired at 8 cost of P9,000,000. Poarsess ‘The useful feof the equipment is 10 years. If is estimated that 30,000 units will be extracted each Year, then the deposit will be exhausted in approximately 15 years (450,000 units divided by 20,000 units), which 1s longer than the 10-year useful life of the equipment Accordingly, the equipment should be dé nt should be depreciated over 10 years following the straight line method giving an annual ‘epreciation of P900,000 (9,000,000 divided by 10 years) er, if it is estimated that jowev 80,000 units would be extracted Hip year, then the deposit would be exhausted 1” Spproumately 9 Years, whichis shorter than the 10-year useful GBhof the equipment sa, dpsed nthe etna sdb nd gt Bey Saget eae ee ee ae epreciation per unit (0000045000 units) Pao tion for fist year {50.000 sats extracted x P20) Pr.p00.000 shutdown \When the output method is used in depreciating miing propery withe event of shutdown, such methed cannot be used. In this case, the depreciation inthe year of shutdown i tied on The remaining bie of the equipment following the straugit ne ‘The remaining carrying amount ofthe equipment is divided by Bre maining life ofthe equipment to arrive a the depreciation inthe year of shutdown. ‘Thus, in the preceding example, if there s a shutdown in the facond year, the depreciation is determined as follows 9,000,000 Bquipment at cost ‘Accumulated deprecation Carrying amount bepnning second yen! Depreciation fr second year (800,000 9784") ‘When operations ae reunite depreciation s again compute following the output method. But in such case, a new deprecation rate per unit is combed ane et he ee rng omen fe a sein lta he ee 801 UL Hye J IVSinthe turd yar, operations are resumed and 6a Thus din erated, the depreciation on the equpmens? Smapeted oe floes qupment at cst on Fee eanaan como sessany Lee Carrenganoat Geginingofthrl ear) ee Bue nga eimai depot aaa PE Bcncelati year “sou ns £00.00 units ape 5.111 112/400.000) inn Deprecation forthe third year 60.000 unite x17 78) ostoon ‘Trust fund doctrine Under this doctrine, the share capital of a corporation is conceived as a trust fund for the protection of creditors Consequently, such capital cannot be returned to shareholders during the lume of the corporation, However, the corporation can pay dividends to shareholders ot imied ony he Blanc of rtinedeorningy ‘Accordingly, the corporation cannot pay dividends if it has deficit because this would be tantamount to a return of capital to shareholders. Wasting asset doctrine Under ths doce, a wasting see corporation or an en exqnged in the extraction ofe natural reson ca tity ‘spl to dhareelder dung the hkeme ote ee Acortogy, a wasungatet corporation can pay dividend salve te enon of waned scan pay dvdend not Doe en tana earnings but alas othe extent ot ‘The emount paid in excnes of e for as a hiquidating di retained earnings is accounted wwidend or return of eapital 802 A wasting asset Corporation showed the following account® vesting ans 1,000,000 restart ms fetsned earns 00.000 ‘phe maximum dividend that can be declared by the wastint et corporation would be P300,000, the retained earns Stance of P200,000 plus the acumalated depletion balance 110,000 Ifthe maximum amount is declared as dividend, the yournal entry is as follows Retained earings 200,000 Capitalliguidated co es Dividends payable 0 ividond of P100.000 mex of the retained earn Tie Sov trunly abgwdang end and thus scouted pales tur of ap th sb Athos the ded a be coma alan oop nt eure of dicdend wake rota earnings ‘The accumulated depletion balance is used only for purine Bf determining how much capital can be legally shareholders eduction from the total ‘The “capital liquidated” sooount is a deduction f shareholders’ equity. 803 Ve fivitif Ui Ll ftPhilosophy of the wasting asset doctrine ‘The wasting asset doctrine authorizes the declaratio, dividends in exoess of the retained earnings of the corpurst ton ‘Ths is based on the legal philosophy that to limit divideng declaration to the retained earnings Balance would havent effet of retaining inthe business funds which are not need because the wasting asset is treplaceable ‘The funds then would only be given tothe shareholders whe ‘the corporation is finally dissolved and liquidated . en Re suse a ae rar fins utr already recovered. . Moreover, the creditors are aware of the decreasing capital requirements which are peculiar to corporations engaged sn the exploitation or extraction of natural resources Complete formula ‘The complete formula in determining the maximum dividend that can be declared and paid by a wasting asset corporation 1s a flows: Recaced earangs i Aer depletion Toa em Capral iqadated in price years x Unread depieuen in ending uaventory as ao suseaton ‘The following data are available at ‘the current year-end: utr ant ; ciate 4 Scere aie! fr the current year based on 50 00 un aa Pereracted at P20 per unit aanmnetttee aventory of resource depost (5,000 unis) "300,000 eee i Sr eninge Sacutetmaeae, Maximum dividend “4.400.060 Ifthe amount of P4,400,000 is declared as dividend at year-end, the journal entry is as follows Retained earrings 2,000,000 Cepia liquidated 2.400.000 Devidends payable 4.400000 ‘The cumulative balance of the capital liquidated account of 2,900,000 (P500,000 + P2,400,000) is presented as a deduction from total shareholders’ equnty 805, Wve piv- ,oBLEMS poole 32-1 (IAA) > Company was engaged in the rock and gravel business. ire vatlowing transactions relate to the acquisition a” 3 velopment of an extensive gravel pit: 9019 ne Cost of acquisition and development 960,000 timated output | 2,400,000 tons Production 1,000,000 tons 2020 Additional development cost 490,000 Production 600,000 tons 2021 Additional development cost 500,000 New estimate of remaining output 2,500,000 tons Production 700,000 tons Required: Prepare journal entries for 2019, 2020 and 2021. Problem 32-2 (IAA) Reliable Company purchased a tract of resource land in 2019 for P3,960,000. The content of the tract was estimated at 120,000 unite, When the resource has been exhausted, it is estimated that the land will be worth P 120,000. Building was set up at a cost of P960,000 and heavy equipment was purchased in early January 2019 for P'1,240,000. The useful life of the building is 8 years and the useful life of the equipment is 4 years. In 2019, 12,000 units have been extracted. This was one half of the annual extraction which can be expected following the first year of operations. In 2020, 25,000 units were extracted. Required: Prepare journal entries to record transactions relating to the resource property for 2019 and 2020. 807 =" ~—, al, =e neeProblem 32-3 (IAA) (om January 1, 2019 Univeral Company a P00 009 oan natural resus o 100,000 tango ‘The estimated discounted amount of restoring the land afte, the resource is exhausted is P450,000 and the land will hart Value of P650,000 after it is restored for suitable use '®® Tunaels, bunk houses and other fixed installations gre constructed-in the amount of PS,000.000. Such expenditur are to be charged to mine improvements, i Operations began on January 1, 2020 and resources removed totaled 600,000 tons. During 2021, a discovery was made indicating that available resources after 2021 will total 1,875,000 tons, At the beginning of 2021, additional bunk houses were constructed in the amount of P770,000. In 2021, only’ 400,000, tons were mined because of a strike. Required: Prepare journal entries for 2019, 2020 and 2021 Problem 32-4 (ACP) icon Company provided the following balances at the end of the current year Wasting asset, a cont 20,000,000 ‘Accumulated depletion 2'500,000 ‘Share capital 50,000,000 (Capital quidated 1,800,000 Retained earings J 1500,000 Depletion based on 50,000 units at 20 per unit 100,000 Inventory of resource deposit (8,000 units) 400,000 oa ‘& Compute the maximum dividend that can be declared b. Prepare journal entry to record the declaration of Pee ry to record the declarati problem 32-5 (IAA) tn February, the entity acquired a tract of rewurce land at @ Bet of P3,000,000 which was paid in cath ‘Also, the entity purchased for cash mining equipment of 800,000. ‘The geological survey of the resource property indicated an estimated content of 1,000,000 unite, During the year ended December 31, 2019, the entity mined £90,000 units, of which 85,000 unis were sold for a cash price of P50 per unit ‘The entity paid the following during the year: 2,268,000 300,000 Mining labor and other direct costs ‘Administrative expenses Requires fa. Prepare journal entries including adjustments to reeord the transactions. '. Prepare an income statement for the year ended December 31, 2019. . Prepare a statement of financial position on December 31 2019. 4. Compute the maximum dividend that can legally be declared by the entity on December 31, 2018 ©. Prepare journal entry assuming the ma declared by the entity simum dividend is 809 yw vwee Problem 82-6 (IAA) In 2016, Suaflower Company acquired 2 silver mine, de pone Mindanao. Because the mine is located deep in Fattrman fotier, Sunfiower Company Was able to aayant the'mine fr the low pice of B50,000. In 2017, Sunflower Company constructed @ road to the silver nine costing P5,000,000. Improvements and other evelopment costs made in 2015 cost P750,000, Because of the improvements to the mine and to the surrounding land, itis estimated that the mine ean be sald for P600,000 when mining activities are complete, During 2018, fve buildings were constructed near the site to house the mine workers and their families. ‘The total cost ofthe five buildings was P2,000,000, Estimated residual value is P200,000. In 2019, geologists gatimated that 4,000,000 tons of silver er could be removed om the tine for refinng. During 2019, the first year of operations, only 500,000 tons of silver ore were remaved from the mine. However, in 2020, workers mined 1,000,000 tons of silver During that same year, geologists discovered that the mine contained 3,000,000 tons of silver ore in addition to the ‘original 4,000,000 tons. Development cost ofP1900,000 were made tothe mine ers “in 2000 to lactate the removal af he adional aver, Early in 2020, an additional building was constructed at ae atch evecare © Required: 1. Compute the depletion for 2019 ‘and 2020. 2 Compute the depreciation for 2019 and 2020 810 © of P1,600,000. In 2019, 500 problem 32-7 (AICPA Adapted) suite pn ara it gm Company rahe Saint amet net Pe he 000 of During the current year, the entity incurred P3,600,000 PUfclopment costs preparing the mine for production and eGmoved 80,000 tons and sald 60,000 tons of ore ‘What amount should be reported as depletion for the current a. 1,920,000 B 1:440.000 fe 1:940,000 4. 1,495,000 Problem 32-8 (AA) January 1, 2019, Nisomer Company purchased Tand with On danuary 1 2010, Mery fr Pi. 00 00. The rendual valuta he and was P0000 the time of purchase, a gelogieal Sur Asse output of 00,08 tm constructed onthe land to aid in ort he mined ore at cost sh) tone were mined and sold vey estimated a fry n 209, ade were Hee ie ca ‘end of 2020 estimated 4,200,000 tons A new surve) atthe eine in 2020, 800,000 tons were mined of ore available for mining fand sold What amount should be recognized as deplet a. 1,344,000 . 1'920.000 1,200,000 4. 1/600,000 ‘on for 2020” an pwns VIPULNR Problem 32-9 (AICPA Adapted) At the beginning of current year, Handsome Co, purchased mineral mine for P36,000,000 wit 28D, inated eolpeal Sure oe 2 160.0 eae has an estimated value of P3, 600,000 seo Bas'been ext ornate the The entity incurred P10,800,000 of developmen preparing the property Tor the extraction of gerne CO, During the current year, 270,000 tons we 240.000 tons were sald. What amount of depletion should be included in cos seld for the current year? oe aes 3,600,000 £050,000 4300,000 5'400,000 ere removed ang Problems2-10 (AA) \\t Radical Company acquired » mineral right for Fo 000 ‘ianuary 2018. The mine has'a recoverable ore ete Soon ‘fer it has extracted all the ore, the entity will be required by law to reste the land to the neinal condition at admit ‘amount of P2,000,000. The entity belieyed that the propery {an be sld afterwards fr PO 0000 ” Early in 2019, roads were constructed and other development outs were incurred to aid inthe extraction en teunoporno, fe mined or ata cost of P8000 00 In 2018 200050 raat ore were mised and sald On December 31, 2020 a new survey made by a new minize ‘gineer indicated that 5,000,000 tons of ore were availble fr ‘ining In 2020, 225,000 tons of ore were extracted and sold, ‘What depletion expense should be recognized for 20207 1.650.000 © 1350000 © 1.856.250 4 1410000 siz Problem 32-11 (AICPA Adaprea (on July 1, 2019, ah trchased the rhs ee rs,000.00, of which tpn mess ME ES Eatimated reserve were 1500.00 tons, The entity expects © nro Company, a calendar year entity, ‘zine The total purchase pce WAS extract and sell 25.00) ton pe noch ‘The entity purchased ew equipment on July 1, 2019. The ‘equipment Wae purchased for Poo 000 and hada use fects yeare wih no rend waoe 1 What is the depletion 20197 2, What is the depreciation ofthe equipment for 2019? Problem 82-12 (IAA) : ch inning of earrent year il Company p Ae wate te BancO00, Removable ca ein yased red to restr tho land an estimated sf. 600 nad ise ‘to have a value of Dee opty 50 Thea i ete os Fn ae ceomemne neared 780000 ofdeelpeent ot ie anne for ‘production. During the current, ye 450,000 {he miner moved and 90,00 tons wer ‘ae total amount of deletion shouldbe recorded for the total amount current year? a. 11385. 000 & ioj308 000 © ‘g7o.o0 a. Ysen.000 a1 viva s VWIILA VV-WACMINE MIRA Problem 32-18 (AICPA Adapted) In 2018, Lepanto Mining Company purchased proper ith natural resources for r ere {residual value of P5,000,000. erty had However, the enti to the original con 'P2,000,000. required to restore the proper fiom at a discounted amount ey In 2018, the entity spent P1,000,000 in development cont nd constructed « building on the property costing 3,000,000. * ‘The entity does not anticipate thatthe building will ha TERA hy casual eevuese ae ono {n 2019, an amount of 1,00, 000'was open for additonal development on the mine. " cel ‘The tonnage mined and estimated remaining tons re Tonsextracted Tons remaining 2018 ° 10,000,000 2019 3,000,000 7,000,000, 2020 500,000 2,500;000 1 What amount should be recognized as depletion for 20197 ‘2 6,900,000 b 81600,000 ©. 8,100,000 4 81400,000 2 What amount should be recognized as depletion for 2020? ‘© 10,150,000 b 11,025,000 ©. 15,780,000 4. 9,450,000 aa problem 32-14 (AA) abilant COMPANY acquired soba oar ed of nd antag area CONTAC 1 reste te fant coniion sable For recreational ute ater had extracted the natural aT Geological survey indicated that the recoverable ese fhe 2,600,000 tone and tha the exeactcn wall De Tinpleted in five years band 9,000,000 eloration and development ot 900,000, Pepectedctah Dow fr retrain ot, 1,800,000 {Credit adjusted nak fee eet te 0% vol Lat 10% for 8 pends oe2 What is the depletion charge per ton of extracted material” a 400) NF b 437 e397 4. 360 Problem 32-15 (IAA) During 2019, Prospect Company incurred P4,000,000 in Piblorstion cost for each of 15 il wells dried sn 2018, ‘Of the 18 wels drilled, 10 were dy holes, The entity used ene ccveful effort method of accounting, The entity Gepleted 80% of the al discovered im 2019, int of exploration cost should be reported in the What amou te Peateter 31, 2019 satement of financial position ‘a. 42,000,000 14,000,000 20,000,000 4. 6,000,000 ais ye J iViil 3 villi