QUIZ 1 (Period 2) : DEPLETION

ANSWERS WITH SOLUTIONS

1. The most common method of computing depletion is
Production or Output Method

2. Depletion expense

a. Is usually part of cost of goods sold.

b. Includes tangible equipment in the depletable amount.
c. Excludes intangible development cost from the depletable amount.
d. Excludes restoration cost from the depletable amount.

3. Information needed to compute a depletion charge per unit includes the

a. Estimated total amount of resources available.

b. Amount of resources removed during the period.
c. Cumulative amount of resources removed.
d. Amount of resources sold during the period.

4. Which accurately describes the GAAP regarding the accounting for the costs of drilling dry holes in the oil and
gas industry?

a. Successful effort method

b. Full cost method
c. Both successful effort and full cost
d. Neither successful effort nor full cost method

5. Which of the following is not part of depletable amount?

a. Acquisition cost of the mineral resource deposit

b. Exploration cost
c. Tangible equipment used to extract the mineral resource
d. Intangible development cost such as drilling and tunnel

6. Exploration and evaluation expenditures are incurred

a. When searching for an area that may warrant detailed exploration even though the entity has not yet obtained the
legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained but the technical feasibility and commercial
viability of extracting a mineral resource are not yet demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are being made.
d. In extracting mineral resource and processing the resource to make it marketable or transportable.

7. When is an entity required to recognize exploration and evaluation expenditure as an asset?

a. When such expenditure is recoverable in future periods.

b. When the technical feasibility and commercial viability of extracting the associated mineral resource have been
demonstrated.
c . When required by the entity's accounting policy for recognizing exploration and evaluation asset.
d. Such expenditure is always expensed as incurred.

8. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resource
d. Expenditures for activities in relation to evaluating the technical feasibility and commercial viability of extracting
a mineral resource

9. . An entity is required to consider which of the following in developing accounting policy 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 and measurement concepts for assets, liabilities, income and expenses
c. Recent pronouncements of standard-setting bodies
d. Whether the accounting policy results in information that is relevant and reliable

10. Which of the following is not a disclosure required in relation to exploration and evaluation expenditures?

a. Information about commercial reserve quantity

b. Accounting policy for exploration and evaluation expenditures
c. The amounts of operating and investing cash flows arising from exploration and evaluation of mineral resources
d. Information recognized in the financial statements arising from the exploration and evaluation of mineral
resources

11. Neglected Corporation purchased land for P6,000,000. The company expected to extract 1 million tons of mine from this land over the
next 20 years at which time, residual value shall be zero. During the first 2 years of the mine's operations, 30,000 tons were mined each year
and sold for P80 per ton. The estimate of the total remaining lifetime capacity of the mine was raised to 1,200,000 tons at the start of the third
year and the residual value was estimated to be P480,000. During the third year, 50,000 tons were mined . and sold for P85 per ton.

How much would be the depletion for the third year?

a. P215,000 c. P225,000
b. P227,500 d. P235,000

The Broken Promises Company acquired a tract of land containing an extractable natural resource. The company is required by its
purchase contact to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological
surveys estimate that the recoverable reserves will be 2,000,000 tons and that the land will have a value of P1,200,000 after
restoration. Relevant cost information follows:

Land P9,000,000
Estimated restoration costs 1,800,000

12. If the company maintains no inventories of extracted materials, how much should be charged to depletion expense per ton of extracted
material assuming the amount of estimated restoration cost was already recognized as a liability?
ANSWER: 4.80

13. If the company maintains no inventories of extracted materials, how much should be charged to depletion expense per ton of extracted
material assuming the amount of estimated restoration cost has yet to be recognized?
a. P3.90 c. P4.80
b. P4.50 d. P5.40

14. In 2012, Hopeless Company paid P4,000;000 to purchase land containing a total estimated 160,000 tons of extractable mineral deposits.
The estimated value of the property after the mineral has been removed is P800,000. Extraction activities began in 2013 and by the end of
the yea;, 20,000 tons had been recovered and sold. In 2014, geological studies indicated that the total amount of mineral deposits had been
underestimated by 60,000 tons. During 2014, 30,000 tons were extracted, and 28,000 tons were sold.

What is the depletion rate per ton in 2014?

ANSWER 14.00

15. Super Value Company quarries marble at two locations and sells it to be used in construction of buildings. The company provides for a
depletion rate of 5%. The quarry is leased on a year-to-year basis with the company paying a royalty of P0.05 per ton of marble quarried.
Other data relevant to the requirements are:

Estimated total reserves, tons 60,000,000

Tons quarried through December 31, 2013 4,000,000
 Tons quarried, 2014 1,600,000
Sales, 2014 P1,200,000

How much would be the depletion for 2014 for financial reporting purposes?
a. None c. P 80,000
b. P60,000 d. P300,000

16. Mistress Company has the following information pertaining to its mining operations:

Estimated cost of restoring property after mining

is completed P400,000
Number of tons mined during the current year 50,000 tons
Cost of land P6.0M
Estimated number of tons of ore to be mined 400,000 tons
Sales value of land after mining P300,000
Development costs incurred P500,000
Number of tons sold during the current year 35,000 tons
Cost of production (excluding depletion) P7.00

The company already recognized the estimated restoration cost immediately after the resource property was acquired. How much
would be the company's cost of goods sold?
a. P525,000 c. P787,500
b. P603,700 d. P822,500

17. In 2006, Horton Company purchased a tract of land as a possible future plant site. In January, 2014, valuable sulphur deposits were
discovered on adjoining property and Horton Company immediately began explorations on its property. In December, 2014, after incurring
P400,000 in exploration costs, which were accumulated in an expense account, Horton discovered sulphur deposits appraised at P2,250,000
more than the value of the land.
To record the discovery of the deposits, Horton should
a. make no entry. c. debit P2,250,000 to an asset account.
b. debit P400,000 to an asset account. d. debit P2,650,000 to an asset account.

18. Baton Corporation acquires a coal mine at a cost of P5,000,000. Intangible development costs total P1,200,000. After extraction has
occurred, Baton must restore the property (estimated fair value of the obligation is P600,000), after which it can be sold for P1,700,000. Baton
estimates that 50,000 tons of coal can be extracted.

If 9,000 tons were extracted during the first year, which of the following would be included in the journal entry to record depletion?
a. Debit to Accumulated Depletion for P918,000
b. Debit to Inventory for P918,000
c. Credit to Inventory for P900,000
d. Credit to Accumulated Depletion for P1,530,000

19. Harriet Company is involved in the exploration for mineral rights. During the current year, the entity incurred the following expenditures:
Exploratory drilling for minerals on site 2,000,000
Roads and infrastructure to access exploration site 3,500,000
Expenditures relating to the subsequent development of the resources 3,400,000
At what amount should exploration assets be initially recognized?
A. 2,000,000 C. 5,500,000
B. 5,400,000 D. 8,900,000

20. Samantha Company is involved in the exploration for mineral resources. The accounting policy is to recognize exploration assets and
measure them initially at cost. At the end of the current year, the following amounts were extracted from the financial statements:
Trenching and sampling expenditure 1,000,000
Drilling rigs used for exploration, carrying amount 2,000,000
Drilling rigs used for exploration, depreciation expense 300,000
What amount of intangible exploration assets should be recognized in the financial statements?
A. 0 C. 1,300,000
B. 1,000,000 D. 3,000,000

11. A
Cost P6,000,000
Less: Depletion (1st & 2nd years) 360,000*
 Book value P5,640,000
Less: Residual value 480,000
Depletable book value P5,160,000
÷ Remaining new life in tons 1,200,000
Depletion rate per unit P 4.30
x Units produced/extracted 50,000
Depletion , 3rd year P 215,000

Cost P6,000,000
÷ Original estimated life in units 1,000,000
Depletion rate per unit ` P 6
x Total units extracted (30,000 x 2) 60,000
Depletion (1st & 2nd years) P 360,000*

12. C
Cost P9,000,000
Estimated restoration cost 1,800,000
Value of the land (1,200,000)
Depletable cost P9,600,000
÷ life in units 2,000,000
Depletion per unit P 4.80
PAS 16 states that restoration cost may be necessary to bring the property to its original state. Such restoration cost may be added to
the cost of the property or "deducted" against the estimated residual value of the resource property.

The estimated restoration cost of a property to its original condition is capitalized only when the entity incurs the obligation either when
the asset is acquired or as a consequence of having used the asset during a particular period for purposes other than to produce
inventories during that period.

13. A
Cost P9,000,000
Value of the land (1,200,000)
Depletable cost P7,800,000
÷ life in units 2,000,000
Depletion per unit P 3.90
The estimated restoration cost of a property to its original condition is capitalized only when the entity incurs the obligation either when
the asset is acquired or as a consequence of having used the asset during a particular period for purposes other than to produce
inventories during that period. Since the liability for restoration has yet to be incurred, such cost is not added to the cost of the natural
resource.

14. B
Cost P4,000,000
Depletion, 2013 (20,000 x P20) 400,000
Book value P3,600,000
Value of the land ( 800,000)
Depletable book value P2,800,000
÷ Remaining life in units 200,000*
Revised depletion rate per ton P 14.00
Depletable cost (P4,000,000 - 800,000) P3,200,000
÷ Original life in tons 160.000
Depletion rate per ton P 20

Total life 160,000 tons

Underestimate 60,000 tons
Total life 220,000 tons
Expired life (2013) 20,000 tons
Remaining life in units 200,000 tons*

. 15. A
Since the two quarries are merely being leased and the company pays a P0.0S royalty for every ton of marble quarried, hence, there is
no depletion expense.
 . 16. D
Cost of production, excluding depletion (35,000 x P7) P245,000
Depletion cost (P6,600,000* x 35/400) 577,500
Cost of goods sold P822,500

Cost of land P6,000,000

Development costs incurred 500,000
Cost of restoration of land 400,000
Sales value of land after mining ( 300,000)
Total depletable costs P6,600,000*

. 17. Answer is (B)

Discovery value is generally not recognized.

. 18. Answer is (B)

Cost of coal mine P5,000,000
Development cost 1,200,000
Fair value of restoration cost 600,000
Salvage value (1,700,000)
Depletable cost P5,100,000
÷ Total estimate 50,000
Depletion per ton P 102
x Tons extracted 9,000
Debit to Inventory P 918,000

19. Answer is (A). Exploration assets are expenditures incurred by an entity after the entity has obtained legal rights for the exploration
and evaluation of mineral resources but before the technical feasibility and commercial viability of extracting mineral resources. Only
the exploratory drilling should be recognized as an exploration asset. Roads and infrastructure should not be recognized as exploration
asset but as development cost. PFRS 6, paragraph 10, provides that development expenditures should not be recognized as
exploration asset.

. 20. Answer is (C).

Trenching and sampling expenditure 1,000,000
Depreciation of drilling rigs used for exploration 300,000
Total intangible exploration assets 1,300,000
Exploration asset is either classified as tangible asset or intangible asset. Under PFRS 6, paragraph 9, trenching and sampling
expenditure is an example of intangible exploration asset. The depreciation of the drilling rigs used for exploration should also be part
of intangible exploration assets. However, PFRS 6, paragraph 16, provides that the carrying amount of the drilling rigs is classified as
tangible exploration asset.