DEPLETION

In 20x1, ABC Mining Corp. acquired the right to use 1,000 acres of land to mine for gold. The lease cost
is P50,000,000. The related exploration costs on the property amounted to P10,000,000. It is the policy of
ABC Mining Corp. to capitalize all costs of exploration and evaluation of mineral resources. Intangible
development costs for drilling, tunnels, shafts, and wells incurred before opening the mine amounted to
P85,000,000. A law requires ABC to restore the site at the end of the mine's economic useful life. The
estimated restoration costs have a fair value of P5,000,000. ABC estimates that the mine will provide
approximately 100,000,000 ounces of gold. ABC extracted 300,000 ounces of gold in 20x2.

Requirement: Compute for the depletion charge in 20x1 and 20x2.

Depletion charge in 20x1: 0

Depletion charge in 20x2: P450,000

Acquisition Cost 50,000,000

Exploration Cost 10,000,000

Intangible Development Costs 85,000,000

Restoration Costs 5,000,000

Total cost of natural resource / Depletion Base 150,000,000

Depletion rate per unit = Depletion Base / Total estimated deposits

Depletion Base 150,000,000

Total estimated deposits /100,000,000

Depletion rate per unit 1.50

Depletion = Depletion rate per unit x Actual units extracted

Depletion rate per unit 1.50

Actual units extracted x300,000

Depletion 450,000
In 20x1, ABC Mining Corp. acquired the right to use 1,000 acres of land to mine for gold. The lease cost
is P50,000,000. The related exploration costs on the property amounted to P10,000,000. It is the policy of
ABC Mining Corp. to capitalize all costs of exploration and evaluation of mineral resources. Intangible
development costs for drilling, tunnels, shafts, and wells incurred before opening the mine amounted to
P85,000,000. A law requires ABC to restore the site at the end of the mine's economic useful life. The
estimated restoration costs have a fair value of P5,000,000. ABC estimates that the mine will provide
approximately 100,000,000 ounces of gold. ABC extracted 300,000 ounces of gold in 20x2.
Additional requirement:

Assuming that of the 300,000 ounces of gold extracted in 20x2, 280,000 ounces were sold and 20,000
ounces remain in inventory. How much depletion is recognized in the (a) statement of profit or loss and
other comprehensive income and (b) statement of financial position?

(a) statement of profit or loss and other comprehensive income (as part of cost of sales)
=280,000 x 1.5 = 420,000

(b) statement of financial position (as part of cost of unsold inventory)

=20,000 x 1.5 = 30,000
CHANGES IN ESTIMATES

Illustration 1: Change in estimate In 20x1, ABC Co. acquired land for a total cost of P10,000,000 to be
used to quarry marble, limestone, and construction aggregates. Expenditures incurred in the exploration
for and evaluation of mineral resources before technical feasibility and commercial viability of extracting a
mineral resource are demonstrable totaled P5,000,000. Intangible development costs of drilling, tunnels,
shafts, and wells before the actual production totaled P5,000,000. ABC Co. estimated total recoverable
reserves of 100,000,000 units. Furthermore, ABC Co. expects to sell the land for P1,200,000 after the
resource is depleted. However, no buyer will pay this price unless the mine is drained, filled and leveled -
a process that costs P200,000. It is ABC's policy to capitalize all exploration costs.

Actual units quarried in 20x1 through 20x4 totaled 30,000,000 units. On January 1, 20x5, ABC Co.
estimated that the remaining recoverable reserves are only 25,000,000 units and after the reserves are
exhausted, the land will be sold for P800,000. Costs of disposal are estimated at P300,000. Actual units
quarried in 20x5 totaled 6,000,000 units.

Requirements: Compute for the following:

A. Depletion charge in 20x5
B. Carrying amount of the wasting asset as of December 31, 20x5.

Acquisition Cost 10,000

Exploration Cost 5,000

Intangible Development Costs 5,000

Total cost of natural resource 20,000

Residual Value (1.2M-200k) (1,000)

Depletion Base - 20x1 19,000

Depletion rate per unit = Depletion Base / Total estimated deposits

Depletion Base 19,000,000

Total estimated deposits /100,000,000

Depletion rate per unit .19

Accumulated Depletion = Depletion rate per unit x Actual units extracted

Depletion rate per unit .19

Total units extracted x30,000,000

Accumulated Depletion 5,700,000

 Cost of natural resource 20,000,000

Accumulated Depletion (5,700,000)

Carrying amount - Jan. 1, 20x5 14,300,000

Revised residual value (500,000)

Depletion Base - 20x5 13,800,000

Divide by revised recoverable reserves 25,000,000

Depletion rate per unit - 20x5 .552

Requirement (a): Depletion for 20x5

Depletion = Depletion rate per unit x Actual units extracted

Depletion rate per unit .552

Actual units extracted x6,000,000

Depletion 3,312,000

Requirement (b): Carrying amount of wasting assets as of Dec. 31, 20x5

Resource deposit - quarry, at cost 20,000,000

Accumulated Depletion 20x1-20x4 (5,700,000)

Accumulated Depletion 20x5 (3,312,000)

Carrying amount - Dec. 31, 20x5 10,988,000

 DEVELOPMENT COSTS

I. Intangible development costs Forms part of the cost of the

natural resource and included in
its depletion.

II. Tangible development costs Recognized and depreciated

separately

(A) Movable Depreciated over its own useful life

using any depreciation method

(B) Immovable Depreciated over the shorter of

the equipment's useful life and the
mine's useful life.
1. If equipment's life is shorter, use the
straight line method.
2. If equipment's life is longer, use
units-of-production method.

Immovable tangible equipment

Fact pattern

In 20x1, ABC Co. purchased real estate containing copper for P16,000,000. Exploration costs amounted
to P1,000,000 and intangible development costs of drilling, tunnels, shafts, and wells totaled P4,000,000.
Movable tangible equipment costs for heavy equipment totaled P8,000,000 and immovable tangible
equipment costs for drilling rig foundation totaled P6,000,000.

Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will
be extracted each year. The heavy equipment has a useful life of 10 years. Actual units extracted during
20x1 are 320,000 units.

Case #1: Life of immovable tangible equipment is shorter

The drilling rig foundation has an estimated useful life of 5 years.

Requirements:

a. Compute for the depletion of natural resources.

b. Compute for the depreciation on the movable tangible equipment.
c. Compute for the depreciation on the immovable tangible equipment.
Solutions:

Requirement (a): Depletion on natural resource

Acquisition Cost 16,000,000

Exploration Cost 1,000,000

Intangible Development Costs 4,000,000

Total cost of natural resource / Depletion Base 21,000,000

Depletion rate per unit = Depletion base + Total estimated deposits

Depletion rate per unit = (21M / 2.1M) = 10

Depletion = Depletion rate per unit x Actual units extracted

Depletion = 10 x 320,000 = 3,200,000

Requirement (b): Depreciation on movable tangible equipment

Cost of heavy equipment (movable) 8,000,000

Divide by: Useful life of drilling rig foundation 10

Straight line depreciation 800,000

Requirement (c): Depreciation on immovable tangible equipment

The shorter between (a) the life of the immovable tangible equipment and (b) the life of the mine expressed in years is determined
as follows:

Life of immovable tangible equipment = 5 years

Life of mine in years= Total estimated deposits / Expected annual extraction
= (2.1M units / 300,000 units per year)
= 7 years

The life of the immovable tangible equipment is shorter than the life of the mine. Therefore, the immovable tangible equipment will
be depreciated over its useful life using the straight line method.

Cost of drilling rig foundation (immovable) 6,000,000

Divide by: Useful life of drilling rig foundation 5 years

Straight line depreciation 1,200,000

In 20x1, ABC Co. purchased real estate containing copper for P16,000,000. Exploration costs amounted to
P1,000,000 and intangible development costs of drilling, tunnels, shafts, and wells totaled P4,000,000. Movable
tangible equipment costs for heavy equipment totaled P8,000,000 and immovable tangible equipment costs for
drilling rig foundation totaled P6,000,000.

Estimated recoverable reserves from the mine are 2,100,000 units. It is estimated that 300,000 units will be
extracted each year. The heavy equipment has a useful life of 10 years. Actual units extracted during 20x1 are
320,000 units.

Case #2: Life of immovable tangible equipment is longer

The drilling rig foundation has an estimated useful life of 8 years.
Requirement: Compute for depreciation on the immovable tangible equipment.

Solution:
Life of immovable tangible equipment = 8 years

Life of mine in years= Total estimated deposits + Expected annual extraction

= (2.1M units + 300,000 units per year)
= 7 years

The life of the immovable tangible equipment is longer than the life of the mine. Therefore, the immovable tangible equipment will
be depreciated over the useful life of the mine using the units-of-production method.

Cost of drilling rig foundation (immovable) 6,000,000

Divide by: total estimated deposits 2,100,000

Depreciation rate per unit 2.86

Depreciation = Depreciation rate per unit x Actual units extracted

Depreciation = 2.86 x 320,000
=915,200

Illustration 2: No production in a period

In 20x1, ABC Co. purchased real estate containing copper for P10,000,000. Immovable tangible
equipment costs for drilling rig foundation totaled P5,000,000. Estimated recoverable reserves
from the mine are 1,000,000 units. It is estimated that 100,000 units will be extracted each year;
therefore, the life of the mine in years is 10 years. The drilling rig foundation has an estimated useful life
of 15 years.

Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units were extracted during
20x4 due to an employee strike. Extraction resumed in 20x5 and total units extracted during that year
was 80,000 units.

Requirements: Compute for the following:

a. Depreciation charge on the immovable tangible equipment in 20x4.

b. Depreciation charge on the immovable tangible equipment in 20x5.
Solutions: REQUIREMENT (A):
20x1-20x3 Depreciation (units of production method)

Cost of drilling rig foundation (immovable) 5,000,000

Divide by: total estimated deposits /1,000,000

Depreciation rate per unit 5

Cost of drilling rig foundation (immovable) 5,000,000

Accumulated depreciation(340,000 units x 5) (1,700,000)

Carrying amount - Jan. 1, 20x4 3,300,000

20x4 Depreciation (straight line method) WHY?

Cost of drilling rig foundation (immovable) 3,300,000

Divide by: remaining life of the equipment (15-3) 12

Depreciation 275,000

REQUIREMENT (B):

Cost of drilling rig foundation (immovable) 5,000,000

Accumulated depreciation (1.7M + 275k) 1,975,000

Carrying amount - Jan. 1, 20x5 3,025,000

Remaining reserve deposits as of Jan 1, 20x5

Total estimated deposits - Jan. 1, 20x1 1,000,000

Deposits extracted from 20x1 to 20x3 (340,000)

Remaining deposits - Jan. 1, 20x5 660,000

Carrying amount - Jan. 1, 20x5 3,025,000

Remaining deposits - Jan. 1, 20x5 660,000

Depreciation rate per unit 4.58

Multiply by: units extracted in 20x5 80,000

Depreciation for 20x5 366,400