Reviewer Depreciation and Depletion Expires PDF

Depreciation & Depletion
DEPRECIATION
Essay Questions
Depreciation
1. Explain the concept of depreciation.
Depreciation is the systematic allocation of the depreciable amount of the property, plant
and equipment over the useful life.
Depreciation is not so much a matter of valuation as it is a matter of cost allocation in

recognition of the exhaustion of the life of an item of property, plant and equipment used in
business operations.
The objective of depreciation is to have each period benefiting from the use of the asset
bear an equitable share of the asset cost.
2. Explain the "depreciation period".
Depreciation of an asset begins when it is available for use, meaning, when the asset is in
the location and condition I necessary for it to be capable of operating in the manner
intended by management.
Depreciation is normally computed on the basis of the nearest I full month and nearest
peso.
Depreciation of asset ceases when the asset is derecognized. I Therefore, depreciation
does not cease when the asset becomes I idle temporarily.
However, if the asset is "classified as held for sale" in accordance* with PFRS 5,
depreciation shall be discontinued.
3. What are the two kinds of depreciation?
1. Physical depreciation is related to the depreciable asset's wear and tear and
deterioration over a period.
Physical depreciation may be caused by:
a. Wear and tear due to frequent use.
b. Passage of time due to nonuse.
c. Accident such as fire, flood, earthquake and other natural disaster.
d. Action of the elements such as wind, sunshine, rain or dust.
Essay Questions Page 1

FINANCIAL ACCOUNTING
e. Disease - is applicable to animals and wooden buildings.
2. Functional or economic depreciation arises from technical obsolescence or inadequacy

of the asset to perform efficiently.
Obsolescence may arise from the following:

a. When there is no future demand for the product that the asset produces.
b. When a new asset becomes available and the new asset can perform the same
function for substantially less cost.
Inadequacy arises when an asset is no longer useful to the ifrm because of an increase
in the volume of operations.
For example, adequate buildings acquired at the inception of business may become
inadequate or limited in their future service potential when unexpected business growth
or expansion requires larger facilities for efficient operation.
4. Explain the three factors of depreciation.
In order to properly compute the amount of depreciation to be charged as expense during

an accounting period, three factors are necessary, namely:
a. Depreciable amount
b. Residual value
c. Useful life
5. Explain "depreciable amount".
Depreciable amount is the cost of an asset or other amount substituted for cost less its
residual value.
Each part of an item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item shall be depreciated separately.
For example, it may be appropriate to depreciate separately the airframe, engines, fittings
(seats and floor coverings) and tires of an aircraft.
To the extent that an entity depreciates separately some significant parts of an item of
property, plant and equipment, it also depreciates separately the remainder of the item.
MCQ – Theory: Depreciation Page 2

The remainder consists of the parts of the item that are individually not significant.
6. Explain "residual value".
Residual value of an asset is the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated cost of disposal, if the asset were
already of the age and condition expected at the end of its useful life.
Simply stated, residual value is the estimated net amount currently obtainable if the asset is
at the end of its useful life.
The residual value of an asset shall be reviewed at least at each financial year-end and if
expectation differs from previous estimate, the change shall be accounted for as a change
in an accounting estimate.
In practice, the residual value of an asset is often insignificant and therefore immaterial in
the calculation of the depreciable amount.
The residual value of an asset may increase to an amount equal to or greater than the
asset's carrying amount.
If it does, the asset's depreciation charge is zero unless and until the residual value
subsequently decreases to an amount below the asset's carrying amount.
7. Explain "useful life" of an asset.
Useful life or service life is either the period of time over which an asset is expected to be
used by the entity or the number of production or similar units expected to be obtained from
the asset by the entity.
As distinguished from useful life, physical life refers to how long the asset would last. The
useful life of an asset may be expressed in years, units of output and service hours.
8. What are the factors that should be considered in determining the useful life of an asset?
a. Expected usage of the asset. The expected usage of the asset is assessed by
reference to the expected capacity or physical output.
b. Expected physical wear and tear. The expected physical wear and tear of an asset
depend on the operational factors such as the number of shifts the asset is used, the

repair and maintenance program, and the care and maintenance of the asset while
idle.
c. Technical obsolescence. Technical obsolescence arises from changes or
improvements in production or change in the market demand for the product output of
the asset.
d. Legal limits for the use of the asset, such as the expiry date of the related lease.
9. What are the methods of depreciation?
1. Equal or uniform charge methods - straight fine, composite method and group method
2. Variable charge or use-factor methods - service hours and output or production method
3. Decreasing charge or accelerated or diminishing balance methods - sum of years'
digits, declining balance and double declining balance
4. Other methods - inventory, retirement and replacement method
10. Explain the "straight line" method of depreciation.
Under the straight line method, the annual depreciation charge is calculated by allocating
the depreciable amount equally over the number of years of estimated useful life. In other
words, straight line depreciation is a constant charge over the useful life of the asset.
The formula for the computation is as follows:

Cost minus residual value
Annual depreciation
Life in years
Cost minus residual value equals depreciable amount.
Depreciable amount multiplied by the annual straight line rate of depreciation also gives the
amount of annual depreciation.
The straight line rate is determined by dividing 100% by the life of the asset in years.
For example, if the life of the asset is 5 years, the annual straight line rate is 20%,
computed by dividing 100% by 5 years.
The straight line method is widely used in practice because of simplicity. This method is
adopted when the principal cause of depreciation is passage of time. The straight line
approach considers depreciation as a function of time rather than as a function of usage.
Examples of assets which depreciate principally because of passage of time are buildings,
other structures such as radio and TV towers, dams, bridges, and office equipment such as
typewriters, adding machines, computers.

11. Explain the "composite method" and "group method" of depreciation.
The composite method and group method are a variation of the straight line method of
depreciation. Under the composite method, assets that are dissimilar in nature or assets
that have different physical characteristics and vary widely in useful life, are grouped and
treated as a single unit.
Under the group method all assets that are similar in nature and in estimated useful life are
grouped and treated as a single unit.
The accounting procedure and the method of computation for the composite and group
method are essentially the same. In other words, the average life and the composite or
group rate are computed, and the assets in the group are depreciated on that basis.
a. Depreciation is reported in a single accumulated depreciation account. Thus, the
accumulated depreciation account is not related to any specific asset account.
b. The composite or group rate is multiplied by the total cost of the assets in the group to
get the periodic depreciation.
c. When an asset in the group is retired, no gain or loss is recognized. The asset is
credited for the cost of the asset retired and the accumulated depreciation is debited
for the cost minus salvage proceeds.
d. When the asset retired is replaced by a similar asset, the replacement is recorded by
debiting the asset and crediting cash or other appropriate account.
Subsequently, the composite or group rate is multiplied by the balance of the asset account
to-get the periodic depreciation.
12. What are the "variable charge" methods of depreciation?
The variable methods assume that depreciation is more a function of use rather than
passage of time. The life of the asset is considered in terms of the output it produces or the
number of hours it works. Thus, depreciation is related to the estimated production
capability of the asset and is expressed in a rate per unit of output or per hour of use.
The variable methods are working hours method and output or production method.
Such methods are adopted if the principal cause of depreciation is usage. The use of these
methods is based on the following:
a. Assets depreciate more rapidly if they are used full time or overtime.

b. There is a direct relationship between utilization of assets and realization of revenue.
If assets are used more intensively in production, greater revenue is expected. The
variable methods are found to be appropriate for assets such as machineries.
13. Explain the "working hours" method of depreciation.
Under working hours method, a depreciation rate per hour is computed by dividing the
depreciable amount by the estimated life in terms of service hours. The depreciation rate
per hour is then multiplied by the actual hours worked in one period to get the depreciation
for that period.
14. Explain the output or production method of depreciation.
The output or production method results in a charge based on the expected use or output.
Under this method, a depreciation rate per unit is computed by dividing the depreciable
amount by the estimated life in terms of units of output. The depreciation rate per unit is
then multiplied by the yearly output to get the annual depreciation.
15. What are the decreasing or accelerated methods of depreciation?
The decreasing charge or accelerated methods provide higher depreciation in the earlier
years and lower depreciation in the later years of the life of the asset. Thus, these
methods result in a decreasing depreciation charge over the useful life. This is on the
philosophy that new assets are generally capable of producing more revenue in the earlier
years than in the later years.
The decreasing charge methods are as follows:

a. Sum of years' digits
b. Declining balance
c. Double declining balance .
16. Explain the "sum of years' digits" method.
Under the sum of years' digits method, the depreciation is computed by multiplying the
depreciable amount by a series of fractions whose numerator is the digit in the life of the
asset and whose denominator is the sum of the digits in the life of the asset.
For example, if the life is 4 years, the sum of year's digits is 1 + 2 + 3 + 4 or 10.

Thus, the depreciation would be 4 /10 for the first year, 3/10 for the second year, 2/10 for
the third year and 1/10 for the fourth and last year.
17. Explain the "declining balance" method.
Under the declining balance method, a fixed or uniform rate is multiplied by the declining
carrying amount of the asset in order to arrive at the annual depreciation.
Because of the use of a fixed rate, this method is also known as fixed rate or percentage on
diminishing carrying amount method. The problem in this method is the determination of
the fixed rate to be applied against the carrying amount. The following formula is derived to
get the fixed rate:
n
Rate = 1 - V Residual value * Cost
The "n" in the formula is the life of the asset.
18. Explain the "double declining balance" method of depreciation.
The double declining balance is the same as the declining balance method in that a fixed
rate is also multiplied by the declining carrying amount of the asset to arrive at the annual
depreciation. However, under double declining balance, the straight line rate is simply
"doubled" to get the fixed rate. For example, if the life is 5 years, the straight line rate is
20% (100% divided by 5 years). Thus, the fixed or double rate is 40% (20% times 2).
19. Explain the inventory method of depreciation.
The inventory method consists of merely estimating the value of the asset at the end of the
period. The difference between the balance of the asset account and the value at the end
of the year is then charged off as depreciation for the year. In recording depreciation, no
accumulated depreciation account is maintained. The depreciation is credited directly to the
asset account. This depreciation approach is applied generally to assets which are small
and relatively inexpensive such as hand tools or utensils. It is defended on practical
grounds.
20. Explain the retirement and replacement method of depreciation.
Under the retirement method of depreciation, no depreciation is recorded until the

asset is retired. The amount of depreciation is equal to the original cost of the asset retired
minus salvage proceeds. Under the replacement method no depreciation is recorded until
the asset is retired and replaced. The amount of depreciation is equal to the replacement

cost of the asset retired, minus salvage proceeds.
If the asset retired is not replaced, the original cost of the asset retired but not replaced is
charged off as depreciation. The retirement and replacement method may be used in much
the same situations as the inventory method. They are suitable when a large number of
similar items are employed by the entity and the items are constantly being retired and
replaced.
Exploration & Evaluation of Mineral Resources & Depletion
21. Define the term "exploration and evaluation of mineral resources" under PFRS 6.
Mineral resources include minerals, oil, natural gas and similar nonregenerative resources.
The term "exploration and evaluation of mineral resources" is defined as the search for
mineral resources after the entity has obtained legal rights to explore in a specific area as
well as the determination of the technical feasibility and commercial viability 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 a
mineral resource are known as exploration and evaluation expenditures.
22. Give examples of exploration and evaluation expenditures.'
1. Acquisition of rights to explore

2. Topographical, geological, geochemical and geophysical studies
3. Exploratory drilling
4. Trenching
5. Sampling
6. Activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.
7. General and administrative costs directly attributable to exploration and evaluation
activities.
Expenditures related to development of mineral resources, for example, preparation for

commercial production, such as building roads and tunnels, cannot be recognized as
exploration and evaluation expenditures.

23. What is the treatment of exploration and evaluation expenditures?
The exploration and evaluation expenditures may qualify as exploration and evaluation
asset.
Under PFRS 6, an entity must develop its own accounting policy for the recognition of such
asset. An entity is permitted to continue to apply its previous accounting policy provided
that the resulting information is relevant and reliable. An exploration and evaluation asset
shall be measured initially at cost. After initial recognition, an entity shall apply either the
cost model or the revaluation model. Exploration and evaluation asset is classified either
as tangible asset or an intangible asset.
24. Explain the impairment of exploration and evaluation asset.
PFRS 6, paragraph 18, provides that exploration and evaluation asset shall be assessed for
impairment when facts and circumstances suggest that the carrying amount may exceed
recoverable amount. The facts and circumstances that may indicate impairment include:
a. The period for which the entity has the right to explore in a specific area has expired
and is not expected to be renewed.
b. Substantive expenditure for exploration and evaluation is neither budgeted nor
planned.
c. The exploration and evaluation activities have not led to the discovery of commercially
viable quantity of mineral resource and the entity has decided to discontinue such
activities.
d. Sufficient data indicate that the carrying amount of the exploration and evaluation asset
is unlikely to be recovered in full from successful development or by sale.
25. Define "wasting assets".
Wasting assets are material objects of economic value and utility to man produced by
nature. Wasting assets are actually natural resources. Natural resources usually include
coal, oil, ore, precious metals like gold and silver, and timber. Wasting assets are so called
because these are physically consumed and once consumed, the wasting assets cannot be
replaced anymore.
If ever, the wasting assets can be replaced only by the process of nature. Natural resources
cannot be produced by man. Wasting assets are physically consumed and irreplaceable.
26. What is the cost of a wasting asset?
Entities follow a wide variety of practices in accounting for an extractive industry. At

present, IFRS does not address wasting assets. There is no comprehensive standard that
is applicable to the extractive or mining industry. In general, the cost of wasting asset or a
natural resource can be divided into four categories, namely:
a. Acquisition cost
b. Exploration cost
c. Development cost
d. Estimated restoration cost
27. Explain the "acquisition cost" of a wasting asset.
Acquisition cost is the price paid to obtain the property containing the natural resource.
Unquestionably, this is the initial cost of the wasting asset. Generally, the acquisition cost
is charged to any descriptive natural resource account. If there is a residual land value
after the extraction of the natural resource, the portion of the acquisition cost applicable to
the land may be included in the natural resource account or may be set up in a separate
account and the remaining cost should be charged to the natural resource account.
Actually, the land value is the residual value of a wasting asset for purposes of computing
depletion. Thus, the land value should be deducted from the total cost to get the depletable
amount.
28. Explain "exploration cost" of a wasting asset.
Under PFRS 6, exploration cost is the expenditure incurred before the technical feasibility
and commercial viability of extracting a mineral resource are demonstrated. Simply stated,
exploration cost is the cost incurred in an attempt to locate the natural resource that can
economically be extracted or exploited.
29. Explain the "successful effort" and "full cost" method of accounting for exploration cost.
The exploration cost may be accounted for following:
Under the "successful effort" method, only the exploration cost directly related to the
discovery of commercially producible natural resource is capitalized as cost of the resource
property.
The exploration cost related to "dry holes" or unsuccessful discovery is expensed in the
period incurred.
Under the "full cost" method, all exploration costs, whether successful or unsuccessful, are
capitalized as cost of the successful resource discovery. This is on the theory that any

exploration cost is a "wild goose chase" and therefore necessary before any commercially
producible and profitable resource can be found. The cost of drilling dry holes is part of the
cost of locating productive holes.
Both methods are used in practice. Most large and successful oil entities follow the
successful effort method. The full cost method is popular among small oil entities.
30. Explain the "development cost" of a wasting asset.

Development cost is the cost incurred to exploit or extract the natural resource that has
been located through successful exploration.
Development cost may be in the form of tangible equipment and intangible development
cost.
31. Explain briefly tangible equipment and intangible development cost.
Tangible equipment includes transportation equipment, heavy machinery, tunnels, bunker

and mine shaft. The cost of such tangible equipment is not capitalized as cost of the
wasting asset but set up in a separate account and depreciated in accordance with normal
depreciation policies. Intangible development cost is capitalized as cost of the wasting
asset. Such cost includes drilling cost, sinking mine shaft and construction of wells.
32. Explain the "estimated restoration cost" of a wasting asset.
Estimated restoration cost is the cost to be incurred in order to bring the property to its
original condition. PAS 16, paragraph 16, provides that the estimated cost of restoring the
property to the original condition is capitalized only when the entity incurs the obligation
when the asset is acquired. In other words, the estimated restoration cost must be an
existing present obligation required by law or contract. The estimated restoration cost must
be "discounted".
33. What is the concept of depletion?
Depletion is the removal, extraction or exhaustion of a natural resource or wasting asset.

Depletion, as an accounting procedure, is the systematic allocation of the depletable
amount of a wasting asset over the periods the natural resource is extracted or produced.
In essence, however, depletion is recognized as the cost of the material used in production
and thus becomes the finished product of the extractive entity since the wasting asset is the
total cost of the materials available for production.

34. What is the common method of computing depletion?
Normally, depletion is computed using the output or production method. The depletable
amount of the wasting asset is divided by tk units estimated to be extracted to obtain
depletion rate per unit. The depletion rate per unit is then multiplied by the units extracted
during the year to arrive at the depletion for the period. Depletable amount equals cost of
wasting asset minus residual value. The residual value of wasting asset is represented
only by t value of the land after extraction underneath the resource isj found.
35. What is the method used in computing depreciation of tangible equipment used in mining
operations?
Generally, the depreciation of tangible equipment used in mining operations is based on the
life of the mining equipment or the life of the wasting asset, whichever is shorter. If the life
of the mining equipment is shorter, the straight line method of depreciation is normally
used. But if the life of the wasting asset is shorter, the output method of depreciation 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.
36. Explain the "trust fund doctrine".
Under the trust fund doctrine, the share capital of a corporation is conceived as a trust fund
for the protection of creditors. However, the corporation can pay dividends to shareholders
but limited only to the balance of retained earnings. Accordingly, the corporation cannot
pay dividends if it has a deficit because this would be tantamount to a return of capital to
shareholders.
37. Explain the "wasting asset doctrine".
Under the wasting asset doctrine, a wasting asset corporation or an entity engaged in the
extraction of a natural resource, can legally return capital to shareholders during the lifetime
of the corporation. Accordingly, a wasting asset corporation can pay dividend not only to
the extent of retained earnings but also to the extent of accumulated depletion. The
amount paid in excess of retained earnings is accounted for as a liquidating dividend or
return of capital. The wasting asset doctrine is therefore an exception to the trust fund
doctrine.

38. What is the formula in determining the maximum dividend that can be declared by a
wasting asset corporation?
The formula in determining the maximum dividend that can be declared by a wasting asset
corporation is as follows:
Retained earnings xx
Add: Accumulated depletion xx
Total xx
Less: Capital liquidated in prior years xx
Unrealized depletion in ending inventory xx xx
Maximum dividend xx

Multiple Choice – Theory: Depreciation

Basic concepts
1. It is the systematic allocation of the depreciable amount of an item of property, plant and
equipment.
A. Amortization C. Depreciation
B. Depletion D. Realization TOA © 2013
2. Which of the following statements best describes the term "depreciation"?

A. The removal of an asset from an entity's statement of financial position FA © 2014
B. The systematic allocation of an asset's cost less residual value over the useful life
C. The amount by which the recoverable amount of an asset exceeds carrying amount
D. The amount by which the carrying amount of an asset exceeds recoverable amount
3. As generally used in accounting, what is depreciation?

A. It is a process of asset valuation.
B. It applies only to long-lived intangible asset.
C. It is used to indicate a decline in market value of a long-lived asset.
D. It is an accounting process which systematically allocates long-lived asset cost to
accounting periods. TOA © 2013
4. Depreciation is best described as a method of

A. Asset valuation C. Current value allocation
B. Cost allocation D. Useful life determination FA © 2014
5. Depreciation is normally computed on the basis of the nearest

A. Day and nearest centavo. C. Full month and nearest centavo.
B. Day and nearest peso. D. Full month and nearest peso. FA © 2014
6. Carrying amount is
A. Cost of an asset or the amount substituted for cost in the financial statements, less its
residual value.
B. Net amount which the entity expects to obtain for an asset at the end of its useful life
after deducting the expected costs of disposal.
C. Amount of cash or cash equivalent paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction.
D. Amount at which an asset is recognized in the statement of financial position after
deducting any accumulated depreciation and accumulated impairment loss. FA © 2014

Depreciation
Residual value
7. Which of the following statements best describes residual value?
A. The estimated net amount currently obtainable if the asset is at the end of the useful
life.
B. The amount of cash or cash equivalents that could currently be obtained by selling the
asset in an orderly disposal.
C. The amount at which the asset could be exchanged between knowledgeable and
willing parties in an arm's length transaction.
D. The present value of estimated future cash flows expected to arise from the continuing
use of the asset and from its ultimate disposal. TOA © 2013
8. Which of the following best describes "residual value"?

A. The amount at which the asset could be exchanged.
B. The present value of future cash flows to be derived from the asset.
C. The estimated net amount currently obtainable if the asset is at the end of the useful
life.
D. The amount of cash that could currently be obtained by selling the asset in an orderly
disposal. FA © 2014
9. Which of the following statements is incorrect concerning the residual value of an item of
property, plant and equipment?
A. The residual value of an asset shall be reviewed at least at each financial year-end.
B. The residual value of an asset may increase to an amount equal to or greater than the
C. The depreciable amount is determined without deducting the residual value of the
asset.
D. In practice, the residual value of an asset is often insignificant and therefore immaterial
in the calculation of the depreciable amount. TOA © 2013
10. Which is incorrect concerning the residual value of an item of property, plant and
equipment?
A. The depreciable amount is determined after deducting the residual value of the asset.
B. The residual value of an asset may increase to an amount equal to or greater than the
C. In practice, the residual value of an asset is often insignificant and therefore immaterial
in the calculation of the depreciable amount.
D. The residual value of an asset shall be reviewed at least at each financial year-end and
if expectations differ from previous estimate, the change shall be accounted for as a
change in accounting policy. FA © 2014

Depreciable amount
11. Which of the following terms best describes the cost or an amount substituted for cost of an
asset less the residual value?
A. Carrying amount C. Recoverable amount
B. Depreciable amount D. Revalued amount FA © 2014
Useful life
12. The useful fife of an item of property, plant and equipment is
I. The period of time over which an asset is expected to be used by the entity.
II. The number of production or similar units expected to be obtained from the asset by
the entity.
A. I only C. Both I and II
B. II only D. Neither I nor II FA © 2014
13. Economic factors that shorten the service life of an asset include
A. Supersession and inadequacy
B. Inadequacy and obsolescence
C. Obsolescence and supersession
D. Obsolescence, supersession and inadequacy FA © 2014
14. All the following factors need to be considered in determining the useful life of an asset,
except
A. Expected physical wear and tear C. Residual value
B. Expected usage of the asset D. Technical obsolescence FA © 2014
15. The major difference between the service life of an asset and the physical life is that
A. Physical life is always longer than service life.
B. Service life refers to the time an asset would be used by an entity and physical life
refers to how long the asset would last.
C. Physical life is the life of an asset without consideration of residual value and service
life requires the use of residual value.
D. Service life refers to the time an asset would be used by the original owner while
physical life refers to how long the asset would be used by all owners. FA © 2014
16. Technical or commercial obsolescence arises from

A. Expected usage of the asset
B. Expected physical wear and tear
C. Expiry date of related lease of the asset
D. Changes or improvements in production or change in the market demand for the
product output of the asset FA © 2014

Depreciation
17. An addition that is an integral part of an older asset normally would be depreciated over
A. The useful life of the addition
B. The useful life of the original asset
C. Either the useful life of the addition or the original asset
D. The useful life of the addition or the original asset, whichever is shorter FA © 2014
18. If spare parts and servicing equipment can be used only in connection with an item of
property, plant and equipment, these are accounted for as property, plant and equipment
and depreciated over
A. Their useful life
B. The useful life of the related asset
C. Their useful life or the useful life of the related asset, whichever is longer
D. Their useful life or the useful life of the related asset, whichever is shorter FA © 2014
Production method
19. Which of the following depreciation methods is not based on the passage of time?
A. Declining balance C. Sum of units method
B. Straight line D. Sum of years' digits TOA © 2013
20. Which method is not based on the passage of time?

A. Declining balance C. Straight line
B. Output method D. Sum of years' digits FA © 2014
21. In which of the following situations is the production method of depreciation most
appropriate?
A. An asset is subject to rapid obsolescence
B. An asset's service potential declines with use
C. An asset's service potential declines with the passage of time
D. An asset incurs increasing repairs and maintenance with use FA © 2014
22. What factor must be present to use the production method of depreciation?
A. Obsolescence is expected
B. Repair costs increase with use
C. Total units to be produced can be estimated
D. Production is constant over the life of the asset FA © 2014
23. The production method of depreciation results in

A. Constant charge over the life of the asset.
B. Increasing charge over the life of the asset.

C. Decreasing charge over the life of the asset.

D. Variable charge based on the expected use or output of the asset. FA © 2014
Straight-line depreciation
24. Which of the following statements is the assumption on which straight line depreciation is
based?
A. Service value declines as a function of time rather than use.
B. The operating efficiency of the asset decreases in later years.
C. Service value declines as a function of obsolescence rather than time.
D. Physical wear and tear are more important than economic obsolescence. FA © 2014
25. A principal objection to the straight line method of depreciation is that it

A. Ignores variation in the rate of asset use
B. Provides for the declining productivity of an aging asset
C. Gives smaller periodic writeoff than decreasing charge methods FA © 2014
D. Tends to result in a constant rate of return on a diminishing investment base
26. The straight line method of depreciation is not appropriate for

A. Equipment used consistently every period.
B. Equipment with useful life that is not affected by the amount of use.
C. Equipment on which maintenance and repairs increase substantially with age.
D. An entity that is neither expanding nor contracting its investment in equipment because
it is replacing equipment as the equipment depreciates. FA © 2014
27. Which of the following uses straight-line depreciation?

A. Composite depreciation C. Sum of years' digits FA © 2014
B. Group depreciation D. Group and composite depreciation
Component depreciation
28. An entity bought a private jet for the use of its top ranking officials. The private jet is
expected to be used over a period of 7 years. The engine of the jet has a useful life of 5
years. The private jet's tires are replaced every 2 years. The private jet shall be depreciated
using the straight line method over
A. 7 years composite useful life.
B. 2 years useful life based on conservatism.
C. 5 years useful life based on a simple average of the useful lives of all major
components of the jet.
D. 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life
applied to the balance cost of the jet. FA © 2014

Depreciation
Composite depreciation method

29. The composite depreciation method
A. Is an accelerated method of depreciation
B. Is applied to a group of homogeneous assets
C. Excludes residual value from the base of the depreciation calculation
D. Does not recognize gain or loss on the retirement of single asset in the group FA © 2014
30. Which of the following depreciation methods is not appropriate for situations involving a
large number of similar items, each having a small peso cost?
A. Composite method C. Replacement method
B. Inventory method D. Retirement method FA © 2014
31. An entity using the composite depreciation method for its fleet of trucks, cars and campers
retired one of its trucks and received cash from a salvage entity. The net carrying amount of
these composite asset accounts would be decreased by the
A. Original cost of truck
B. Cash proceeds received
C. Original cost of the truck less the cash proceeds
D. Cash proceeds received and original cost of the truck FA © 2014
Accelerated depreciation method

32. Which of the following provides the best theoretical support for accelerated depreciation?
A. Expenses should be allocated in a manner that "smooths" earnings.
B. Assets are more efficient in early years and initially generate more revenue.
C. Accelerated depreciation provides easier replacement because of the time value of
money.
D. Repairs and maintenance costs will probably increase in later periods so depreciation
should decrease. FA © 2014
Declining balance method

33. In which of the following depreciation methods is residual value not a factor in determining
depreciation charge in the early years of the asset's life?
A. Declining balance C. Service hours
B. Productive output D. Straight line FA © 2014
34. Which depreciation method applies a uniform depreciation rate each period to an asset's
carrying amount?
A. Declining balance C. Straight line
B. Output method D. Sum of years' digits TOA © 2013

35. The double declining balance method

A. Results in a decreasing depreciation charge.
B. Means the carrying amount should not be reduced below residual value.
C. Means residual value is not deducted in computing the depreciation base.
D. All of these FA © 2014
Double-declining method
36. A method which excludes residual value from the base for the depreciation calculation is
A. Double declining balance C. Straight line
B. Productive output D. Sum of years' digits TOA © 2013
37. A machine with a four-year estimated useful life and an estimated 15% residual value was
acquired at the beginning of the current year. The increase in accumulated depreciation for
the second year using the double declining balance method would be
A. Original cost x 50% C. Original cost x 85% x 50% TOA © 2013
B. Original cost x 50% x 50% D. Original cost x 85% x 50% x 50%
Sum-of-the-years’ digits method

38. The sum of years' digits method
A. Results in residual value being ignored.
B. Results in an increasing depreciation charge.
C. Means the carrying amount should not be reduced below residual value. FA © 2014
D. Means the denominator is the number of years remaining at the beginning of the year.
39. In other to calculate the depreciation of an asset for the third year using the sum of years'
digits method, which of the following must be known about the asset?
A. Acquisition cost C. Useful life
B. Residual value D. All must be known TOA © 2013
40. An asset has a nine-year useful life and is to be depreciated under the sum of years' digits
method. The annual depreciation expense would be the same as that under the straight line
method in the
A. Third year C. Seventh year
B. Fifth year D. Ninth year TOA © 2013
41. A machine with a 5-year estimated useful life and an estimated residual value was acquired
at the beginning of the current year. At the end of the fourth year, accumulated depreciation
using the sum of years' digits method would be

Depreciation
A. Original cost multiplied by 1/15

B. Original cost multiplied by 14 / 15
C. Original cost less residual value multiplied by 1/15
D. Original cost less residual value multiplied by 14 / 15 FA © 2014
Change in estimate
42. The depreciation method applied to property, plant and equipment shall be reviewed
periodically, and if there has been a significant change in the expected pattern of
consumption of economic benefits from those assets, the change
A. Shall not be recognized
B. Shall be accounted for as a change in accounting policy
C. Shall be accounted for as correction of a prior period error
D. Shall be accounted for as a change in accounting estimate FA © 2014
43. The useful life of an item of property, plant and equipment shall be reviewed periodically
and if expectations are significantly different from previous estimates, the depreciation
charge for the
A. Prior periods shall be adjusted
B. Future period only shall be adjusted
C. Current period only shall be adjusted
D. Current and future periods shall be adjusted FA © 2014
44. An entity acquired equipment and used the straight line depreciation with a useful life of 15
years and no residual value. After 4 years of using the asset, the remaining life of the
equipment was six years with no residual value. How should this change be accounted for?
A. Revising future depreciation annually to equal the original cost divided by six.
B. Revising future depreciation annually to equal the depreciable amount divided by six.
C. Revising future depreciation annually to equal the carrying amount after 4 years
divided by six.
D. Disclosing the effect of the change but maintaining the depreciation as originally
determined. FA © 2014
45. If there is a change from double declining balance to straight line method
A. The accumulated depreciation is adjusted through net income based on straight line.
B. The accumulated depreciation is adjusted through retained earnings based on straight
line.
C. The accumulated depreciation is not adjusted but the remaining carrying amount is
allocated over the original life using the straight line.
D. The accumulated depreciation is not adjusted but the remaining carrying amount is
allocated over the remaining life using the straight line. FA © 2014

Sensitivity analysis
46. A depreciable asset has an estimated residual value. At the end of the estimated useful life,
the accumulated depreciation would equal the original cost of the asset under which of the
following depreciation methods? FA © 2014
A. Straight line C. Both straight line and output method
B. Output method D. Neither straight line nor output method
Comprehensive
47. Which of the following statements is true?
A. A gain on disposal of a noncurrent asset is classified as revenue.
B. Assets are depreciated even if their fair value exceeds their carrying amount.
C. Land and buildings are not accounted for separately when acquired together. FA © 2014
D. A noncurrent asset acquired as the result of an exchange of assets is not recognized.
48. Which of the following statements is true about depreciation?

A. It is not a matter of valuation.
B. It is part of matching expenses with revenue.
C. It retains funds by reducing income taxes and dividends.
D. All of the statements are true. FA © 2014
49. Which of the following statements regarding depreciation is true?

A. The total cost of an asset must eventually be depreciated.
B. The annual depreciation charge must be constant over the life of the asset.
C. An asset must be depreciated from the date of its purchase to the date of sale.
D. If the carrying amount of an asset is less than the residual value, depreciation is not
charged. FA © 2014
50. Winch of the following statements is incorrect with respect to depreciation?

A. The depreciable amount of item of property, plant and equipment shall be allocated on
a systematic basis over its useful life.
B. The depreciation method used shall not reflect the pattern in which the asset's
economic benefits are consumed by the entity.
C. The depreciation charge for each period shall be recognized as an expense unless it is
included in the carrying amount of another asset.
D. The estimation of the useful life of an item of property, plant and equipment is a matter
of judgment based on the experience of the entity with similar assets. FA © 2014

51. Which of the following statements is incorrect concerning the depreciation methods?
A. Under the output method, the cost per unit of production is constant.
B. The sum of years' digits method provides for a decreasing depreciation charge.
C. First-year depreciation under the double declining balance method is computed as the
depreciable amount multiplied by double the straight line rate.
D. The straight line method is particularly appropriate where the asset is expected to
decline in usefulness as a function of time and the expected use pattern of the asset is
fairly constant over time. TOA © 2013
Multiple Choice – Theory: Exploration & Evaluation of Mineral Resources & Depletion
52. Depletion expense
A. Is usually part of cost of goods sold.
B. Excludes restoration cost from the depletable amount.
C. Includes tangible equipment cost in the depletable amount.
D. Excludes intangible development cost from the depletable amount. FA © 2014
53. The most common method of computing depletion is

A. Decreasing charge method C. Production method
B. Percentage depletion method D. Straight line FA © 2014
54. Which of the following is not part of depletable amount?

A. Exploration cost
B. Acquisition cost of the mineral resource deposit
C. Intangible development cost such as drilling, tunnel and shaft
D. Tangible development cost associated with equipment used to extract the mineral
resource FA © 2014
55. Information needed to compute a depletion charge per unit includes the
A. Cumulative amount of resources removed.
B. Amount of resources sold during the period.
C. Amount of resources removed during the period.
D. Estimated total amount of resources available for removal. FA © 2014
56. Which of the following most accurately describes the generally accepted accounting
principle regarding the accounting for the costs of drilling dry holes in the oil and gas
industry?
a. Only the successful effort method may be used.
b. Only the full cost method may be used.
c. Both the successful effort and full cost methods may be used.
MCQ – Theory: Exploration & Evaluation of Mineral Resources & Depletion Page 23
d. Neither the successful effort method nor the full cost method may be used pending the
promulgation by the Securities and Exchange Commission of the approach in
accounting for the costs of drilling dry holes. FA © 2014
57. Exploration and evaluation expenditures are incurred

A. When a specific area is being developed and preparations for commercial extraction
are being made.
B. In extracting mineral resource and processing the resource to make it marketable or
transportable.
C. 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.
D. 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. FA © 2014
58. When is an entity required to recognize exploration and evaluation expenditure as an

asset?
A. Such expenditure is always expensed as incurred.
B. When such expenditure is recoverable in future periods.
C. When required by the entity's accounting policy for recognizing exploration and
evaluation asset.
D. When the technical feasibility and commercial, viability of extracting the associated
mineral resource have been demonstrated. FA © 2014
59. Which type of expenditure is included in the term "exploration and evaluation" of mineral
resources.
I. The extraction and processing of mineral resources for transport to market.
II. The commercial review of possible areas for mineral extraction before bidding for the
legal rights to explore a specific area.
A. I only C. Either I or II
B. II only D. Neither I nor II TOA © 2013
60. Which type of expenditure is included in the term "exploration and evaluation" of mineral
resources.
A. The extraction and processing of mineral resource for transport to market.
B. The commercial review of possible areas for mineral extraction before bidding for the
legal right to explore a specific area.
C. The expenditure incurred after the technical feasibility and commercial viability of
extracting a mineral resource are demonstrable.
D. None of these should be included in exploration and evaluation expenditures. FA © 2014
61. Which of the following expenditures would never qualify as an exploration and evaluation
asset?
A. Expenditure for exploratory drilling
B. Expenditure for acquisition of rights to explore
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 FA © 2014
62. Does PFRS 6 require an entity to recognize exploration and evaluation expenditure as an
asset?
A. No, such expenditure is always expensed as incurred.
B. Yes, but only to the extent such expenditure is recoverable in future periods.
C. Yes, but only to the extent required by the entity's accounting policy for recognizing
exploration and evaluation asset.
D. Yes, but only to the extent the technical feasibility and commercial viability of extracting
the associated mineral resource have been demonstrated. TOA © 2013
63. Which measurement model applies to exploration and evaluation asset subsequent to initial
recognition?
A. The cost model
B. The revaluation model
C. The recoverable amount model
D. Either the cost model or the revaluation model FA © 2014
64. Which of the following facts or circumstances would not trigger a need to test an evaluation
and exploration asset for impairment?
A. The absence of budgeted or planned substantive expenditure on further exploration
and evaluation activities in the specific area.
B. The expiration of the period for which the entity has the right to explore in the specific
area unless the right is expected to be renewed.
C. Lack of sufficient data to determine whether the carrying amount of the exploration and
evaluation asset is likely to be recovered in full from successful development or by
sale.
D. A decision to discontinue exploration and evaluation activities in the specific area when
those activities have not led to the discovery of commercially viable quantities of
mineral resources. TOA © 2013
Multiple Choice – Problems: Depreciation

Output method
1. Tania Company purchased a boring machine on January 1,2014 for P8,100,000. The useful
life of the machine is estimated at 3 years with a residual value at the end of this period of
P600,000. During the useful life, the expected units of production are 12,000 units in
2014,7,000 units in 2015, and 6,000 units in 2016. What is the depreciation expense for
2015 using the most appropriate depreciation method?
A. 1,800,000 C. 2,268,000
B. 2,100,000 D. 3,600,000 P1 © 2014
2. Leonard Company acquired a machine on July 1,2014 and paid the following bills:
Invoice price 5,000,000
Freight in 50,000
Installation cost 150,000
Cost of removing the old machine preparatory
to the installation of the new machine 100,000
The estimated life of the machine is 8 years or a total of 100,000 working hours with no
residual value. The operating hours of the machine totaled 5,000 hours in 2014 and 12,000
hours in 2015. The entity followed the working hours method of depreciation. On December
31, 2015, what is the carrying amount of the machine?
A. 3,900,000 C. 4,316,000
B. 4,299,000 D. 4,940,000 P1 © 2014
3. Canada Company purchased a machine on December 1, 2013 at an invoice price of

P4,500,000 with terms 2/10, n/30. On December 10,2013, the entity paid the required
amount for the machine. On December 1, 2013, the entity paid P80,000 for delivery of the
machine and on December 31,2013, it paid P310,000 for installation and testing of the
machine. The machine was ready for use on January 1,2014. It was estimated that the
machine would have a useful life of 5 years and a residual value of P800,000. Engineering
estimate indicated that the useful life in productive units was 200,000. Units actually
produced during the first two years were 30,000 in 2014 and 48,000 in 2015. The entity
decided to use the output method of depreciation. What is the accumulated depreciation of
the machine on December 31, 2015?
A. 600,000 C. 1,560,000
B. 960,000 D. 1,600,000 P1 © 2014
MCQ – Problems: Depreciation Page 26

Depreciation
Straight-line depreciation
Useful life
4. Hamilton Company provided the following information at year-end:
2015 2014
Building 25,000,000 25,000,000
Accumulated depreciation 5,000,000 3,875,000
The straight-line method of depreciation is used. The residual value is 10% of asset cost.
What is the useful life of the building?
A. 5.00 C. 20.00
B. 6.45 D. 22.22 P1 © 2014
Depreciation
5. On January 1, 2014 Lem Company bought machinery under a contact that required a down
payment of P100,000, plus 24 monthly payments of P50,000 each, for total cash payments
of Pl,300,000. The cash price of the machinery was P1,100,000. The machinery has a
useful life of 10 years and residual value of P50,000. The entity used straight line
depreciation. What amount should be reported as depreciation for 2014?
A. 105,000 C. 125,000
B. 110,000 D. 130,000 P1 © 2014
6. Daisy Company acquired a drilling machine on October 1, 2012 at a cost of P2,500,000 and
depreciated it at 25% per annum on a straight line basis. On October 1,2014, the entity
spent P500,000 on upgrade to the machine in order to improve its efficiency and increase
the inflow of economic benefits over the machine's remaining life. What depreciation
expense should be recognized for the year ended September 30, 2015?
A. 625,000 C. 875,000
B. 850,000 D. 1,125,000 P1 © 2014
Disposal
7. Poe Company disclosed that the depreciation policy on machinery is as follows:
• A full year depreciation is taken in the year of acquisition.
• No depreciation is taken in the year of disposition.
• The estimated useful life is five years.
• The straight line method is used.
On June 30, 2015, the entity sold for P2,300,000 a machine acquired in 2012 for
P4,200,000. The residual value was P600,000. What amount of gain on the disposal
should be recorded in 2015?
A. 140,000 C. 620,000
B. 260,000 D. 980,000 P1 © 2014

8. Monica Company, which has a calendar year accounting period, purchased a new machine
for P2,000,000 on April 1, 2009. At that time, the entity expected to use the machine for
nine years and then sell it for P200,000. The machine was sold for P1,100,000 on
September 30, 2014. The depreciation policy is as follows:
* The straight line method is used.
* No depreciation in the year of acquisition.
* A full year depreciation in the year of disposal.
What amount should be recognized as gain on disposal on September 30,2014?
A. 0 C. 150,000
B. 100,000 D. 200,000 P1 © 2014
Derecognition
9. Lalaine Company acquired an aeroplane three years ago. At the time of acquisition, the
cost of the jet frame was P46,000,000 and the additional cost of the engine was
P6,000,000. During the current year, the engine was replaced with a new one costing
P12,000,000. At the time of replacement, the accumulated depreciation to date on the jet
frame was P17,500,000 and on the engine was P4,000,000. What amount should be
derecognized at the date of replacement?
A. 0 C. 4,000,000
B. 2,000,000 D. 6,000,000 P1 © 2014
Constructive accounting
10. Marian Company purchased an asset with a useful life of 10 years on January 1,2014 for
P6,500,000. On December 31,2014, the amount the entity would receive from the disposal
of the asset if it was already of the age and in the condition expected at the end of the
useful life was estimated at P700,000. Inclusive of inflation, the actual amount expected to
be received on disposal was estimated at P900,000. What is the depreciation charge for
2014?
A. 0 C. 580,000
B. 560,000 D. 650,000 P1 © 2014
Composite method
11. Lester Company provided the following:
Total cost Residual value Estimated life
Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5
The entity computed depreciation on the straight-line method. What is the composite life of
the assets?

Depreciation
A. 13.3 C. 18.0
B. 16.0 D. 19.8 P1 © 2014
Questions 12 & 13 are based on the following information. P1 © 2014

Norraine Company used the composite method of depreciation based cm a composite rate of
25%. At the beginning of 2014, the total cost of equipment was P5,000,000 with a total residual
value of P600,000. The accumulated depreciation was P3,000,000 at that time. In January 2014,
the entity purchased an equipment for P2,500,000 with no residual value. At the end of 2014, the
entity sold an equipment with an original cost of P1,000,000 and a residual value of P200.000 for
P350,000. This asset was acquired on January 1,2012.
12. What is the depreciation for 2014?

A. 975,000 C. 1,625,000
B. 1,125,000 D. 1,875,000
13. What is the gain or loss from the derecognition of the asset on December 31,2014?
A. 150,000 loss C. 0
B. 50,000 loss D. 100,000 gain
Component depreciation
14. Jade Company acquired a new milling machine on April 1,2008. The machine has a special
component that required replacement before the end of the useful life. The asset was
originally recorded in two accounts, one representing the main unit and the other for the
special component. Depreciation is recorded by the straight-line method and residual value
is disregarded. On April 1,2014, the special component is scrapped and is replaced with a
similar component. This new component is expected to have a residual value of
approximately 20% of cost at the end of the useful life of the main unit, and because of
materiality, the residual value will be considered in calculating depreciation.
Main milling machine:
Purchase price in 2008 7,500,000
Residual value 100,000
Estimated useful life 10 years
First special component:
Purchase price 1,200,000
Second special component:
Residual value (20% x 2,000,000) 400,000

What is the total depreciation for 2014?

A. 1,087,500 C. 1,175,000
B. 1,100,000 D. 1,350,000 P1 © 2014
Sum-of-the-years’-digits method
15. On January 1,2012, Mogul Company acquired equipment to be used in its manufacturing
operations. The equipment has an estimated useful life of 10 years and an estimated
residual value of P50,000. The depreciation applicable to this equipment was P240,000 for
2014 computed under the sum of years' digits method. What was the acquisition cost of the
equipment?
A. 1,650,000 C. 2,400,000
B. 1,700,000 D. 2,450,000 P1 © 2014
16. On September 20,2014, Klaudine Company purchased machinery for P7,600,000. Residual
value was estimated at P400,000. The machinery is depreciated over eight years using the
sum of years' digits method. Depreciation is computed on the basis of the nearest full
month. What amount should be recorded as depreciation for 2015?
A. 1,400,000 C. 1,553,800
B. 1,550,000 D. 1,636,120 P1 © 2014
17. Rago Company takes a full year depreciation expense in the year of acquisition, and no
depreciation expense in the year of disposition. Data relating to a depreciable asset on
December 31,2013 are as follows:
Acquisition year 2011
Cost 1,100,000
Accumulated depreciation 720,000
Using the same depreciation method in 2011,2012 and 2013, what amount of depreciation
should be recorded in 2014?
A. 120,000 C. 220,000
B. 180,000 D. 240,000 P1 © 2014
18. On April 1,2014, Kew Company purchased new machinery for P3,300,000. The machinery
has an estimated useful life of five years with residual value of P300,000. Depreciation is
computed by the sum of the years' digits method. What is the accumulated depreciation on
December 31, 2015?
A. 1,000,000 C. 1,600,000
B. 1,200,000 D. 1,800,000 P1 © 2014

Depreciation
19. Frey Company purchased a machine for P4,500,000 on January 1, 2014. The machine has
an estimated useful life of four years and a residual value of P500,000. The machine is
being depreciated using the sum of the years' digits method. What is the carrying amount of
the asset on December 31,2015?
A. 1,350,000 C. 2,700,000
B. 1,700,000 D. 2,900,000 P1 © 2014
Double-declining method
20. Bergen Company purchased factory equipment which was installed and put into service
January 1, 2014 at a total cost of P1,280,000. Residual value was estimated at P80,000.
The equipment is depreciated over eight years by the double declining balance method.
What amount of depreciation expense should be recorded on the equipment for 2015?
A. 225,000 C. 300,000
B. 240,000 D. 320,000 P1 © 2014
21. On July 1, 2014, Mundo Company purchased an equipment for P5,000,000. Residual value
was estimated at P200,000. The equipment is depreciated over ten years using the double
declining balance method. What is the depreciation expense for 2015?
A. 768,000 C. 960,000
B. 900,000 D. 1,000,000 P1 © 2014
22. On January 1,2014, Tania Company acquired an equipment with useful life of 8 years and
residual value of P300,000. The depreciation applicable to this equipment was P900,000 for
2015 using the double declining balance method. What is the acquisition cost of the
equipment?
A. 3,600,000 C. 4,800,000
B. 4,500,000 D. 5,100,000 P1 © 2014
150%-declining method
23. Rapp Company purchased a machine on July 1, 2014 for P6,000,000. The machine has an
estimated useful life of five years and a residual value of P800,000. The machine is being
depreciated by the 150% declining balance method. For the year ended December 31,
2015, what amount should be recorded as depreciation expense on the machine?
A. 1,040,000 C. 1,530,000
B. 1,326,000 D. 1,800,000 P1 © 2014
Sum-of-the-years’ digits vs. Straight-line method

24. In January 2014, Naval Company purchased equipment at a cost of P6,000,000. The
equipment has a useful life of eight years with residual value of P600,000. The entity

considered various methods of depreciation and selected the sum of years' digits method.
On December 31,2015, what is the accumulated depreciation?
A. P750,000 less than under the straight line method
B. P900,000 greater than under the straight line method
C. P750,000 less than under the double declining balance method
D. P900,000 greater than under the double declining balance method P1 © 2014
Multiple Choice – Problems: Change in useful life and method

Depreciation expense
25. Spiderman Company owned a machine that was bought on January 1, 2011 for
P3,760,000. The machine was estimated to have a useful life of five years and a residual
value of P240,000. The entity used the sum of years' digits method of depreciation. On
January 1, 2014, the entity determined that the total useful life of the machine should have
been four years and the residual value is P352,000. What amount should be recorded as
depreciation expense on the machine for 2014?
A. 192,000 C. 592,000
B. 444,000 D. 704,000 P1 © 2014
26. On January 1,2014, London Company purchased a large quantity of personal computers.
The cost of these computers was P6,000,000. On the date of purchase, the management
estimated that the computers would last approximately 4 years and would have a residual
value at that time of P600,000. The entity used the double declining balance method.
During January 2015, the management realized that technological advancements had
made the computers virtually obsolete and that they would have to be replaced.
Management proposed changing the remaining useful life of the computers to 2 years.
What is the depreciation expense for 2015?
A. 1,200,000 C. 2,400,000
B. 1,500,000 D. 3,000,000 P1 © 2014
27. Carmel Company provided the following information with respect to a building
* The building was acquired January 1,2009 at a cost of P7,800,000 with an estimated
useful life of 40 years and residual value of P200,000. Yearly depreciation was
computed on the straight line method.
* The building was renovated on January 1, 2011 at a cost of P760,000. This was
considered as improvement. Residual value did not change.
* On January 1,2014, the management decided to change the total life of the building to
30 years.
MCQ – Problems: Depreciation – Change in useful life & Method Page 32

Depreciation – Change in Useful Life & Method
What is the depreciation of the building for 2014?

A. 266,000 C. 294,000
B. 292,400 D. 334,400 P1 © 2014
28. On January 1,2014, Zoe Company showed accumulated depreciation on machinery with a
balance of P3,700,000. At the end of 2014, after the adjusting entries were posted, the
accumulated depreciation showed a balance of P3,950,000. During 2014, a machine which
cost P1,250,000 was sold for P605,000 cash. The transaction resulted in a loss of P40,000.
No other asset was disposed of during the year. What was the depreciation for 2014?
A. 250,000 C. 855,000
B. 605,000 D. 935,000 P1 © 2014
Accumulated depreciation
29. Turtle Company purchased equipment on January 1, 2012 for P5,000,000. The equipment
had an estimated 5-year service life. The depreciation policy for 5-year assets is to use the
200% double declining balance method for the first two years and then switch to the straight
line depreciation method. In the December 31,2014 statement of financial position, what
amount should be reported as accumulated depreciation for the equipment?
A. 3,000,000 C. 3,920,000
B. 3,800,000 D. 4,200,000 P1 © 2014
30. Arreza Company acquired a machine on January 1, 2012 for P 10,000,000. The machine
has an 8-year useful life with P1,000,000 residual/Value and was depreciated using the
sum of years' digits method. The entity recorded a full year depreciation on the asset in
2012 and 2013. In January 2014, the entity estimated that the useful life of the asset from
the date of acquisition should have been six years and the residual value is P400,000.
What is the accumulated depreciation on December 31,2014?
A. 4,400,360 C. 6,090,000
B. 5,212,500 D. 6,250,000 P1 © 2014
31. Weir Company used straight-line depreciation for property, plant and equipment which
consisted of the following:
2015 2014
Land 250,000 250,000
Buildings 1,950,000 1,950,000
Machinery and equipment 6,950,000 6,500,000
Total 9,150,000 8,700,000
Less: Accumulated depreciation 4,000,000 3,700,000
5,150,000 5,000,000
MCQ – Problems: Depreciation – Change in useful life & Method Page 33

The depreciation for 2015 and 2014 was P550,000 and P500,000, respectively. What
amount was debited to accumulated depreciation during 2015 because of property, plant,
and equipment retirements?
A. 100,000 C. 250,000
B. 200,000 D. 400,000 P1 © 2014
PPE – carrying amount

32. On January 1, 2010, Lane Company acquired equipment for P1,000,000 with a 10-year
useful life and P100,000 residual value. The straight line method of depreciation is used.
During 2014, after the 2013 financial statements had been issued, the entity determined
that this equipment's remaining useful life was only four more years and the residual value
would be P40,000. What is the carrying amount of the equipment on December 31,2014?
A. 390,000 C. 490,000
B. 415,000 D. 515,000 FA © 2014
Multiple Choice – Problems: Exploration & Evaluation of Mineral Resources & Depletion
Oil and gas exploration expense
33. Seacrest Company started business at the beginning of the current year. During the year,
the entity had oil and gas exploration costs of P5,000,000. Of these costs, PI,000,000 was
associated with successful wells and P4,000,000 with so called dry holes. All of the costs
were incurred during the year. The entity used the successful effort method. What is the oil
and gas exploration expense to be reported for the year?
A. 0 C. 4,000,000
B. 1,000,000 D. 5,000,000 FA © 2014
34. Delicate Company is an oil and gas exploration firm. During the current year, the entity
engaged in five different exploration projects. The costs associated with these projects are
as follows:
Project 1 3,250,000
Project 2 1,780,000
Project 3 4,230,000
Project 4 2,400,000
Project 5. 960,000
Only Projects 2 and 5 were successful. As of the end of the current year, production had
not yet started at either of these two sites. Under the successful effort method, what amount
should be recognized as exploration expense in the current year?
A. 0 C. 9,880,000
B. 2,740,000 D. 12,620,000 FA © 2014
MCQ – Problems: Exploration & Evaluation of Mineral Resources & Depletion Page 34
Exploration & evaluation assets

35. Harsh Company is involved in the exploration for mineral resource. The accounting policy is
to recognize and measure exploration asset initially at cost. During the current year, the
entity incurred the following expenditures:
Exploratory drilling for minerals on site and related activities 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 asset be initially recognized in the statement of financial
position?
A. 2,000,000 C. 5,500,000
B. 5,400,000 D. 8,900,000 FA © 2014
36. Sanguine Company is involved in the exploration for mineral resource. The accounting
policy is to recognize and measure exploration asset 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 asset should be recognized in the statement of
financial position?
A. 0 C. 1,300,000
B. 1,000,000 D. 3,000,000 FA © 2014
37. Jannine Company purchased a tract of land as a possible future plant site in a prior year. In
early part of the current year, valuable sulphur deposits were discovered on adjoining
property and the entity immediately began exploration on its property. During the current
year, after incurring P2,000,000 in exploration cost, the entity discovered sulphur deposits
appraised at P12,000,000 more than the value of the land. What is the journal entry to
record the discovery of the sulphur deposits?
A. Make no entry
B. Debit P2,000,000 to an asset account
C. Debit P12,000,000 to an asset account
D. Debit P14,000,000 to an asset account FA © 2014
Depletion expense – Output method

38. In 2013, Newton Company paid P1,000,000 to purchase land containing total estimated
160,000 tons of extractable mineral deposits. The estimated value of the property after the
mineral has been removed is P200,000. Extraction activities began in 2014, and by the end
of the year, 20,000 tons had been recovered and sold. In 2015, geological studies indicated
that the total amount of mineral deposits had been underestimated by 25,000 tons. During
2015,30,000 tons were extracted and 28,000 tons were sold. What is the depletion rate per
ton in 2015?
A. 4.24 C. 4.85
B. 4.32 D. 5.19 FA © 2014
39. Bastion Company acquired a tract of land containing an extractable natural resource. The
entity is required by the purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological survey indicated that
the recoverable reserves will be 4,000,000 tons, and that the land will have a value of
PI,000,000 after restoration.
Land at acquisition cost 9,000,000
Estimated restoration cost at present value 1,200,000
If the entity maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
A. 2.00 C. 2.30
B. 2.25 D. 2.55 FA © 2014
40. Josephine Company acquired a tract of land containing an extractable natural resource.
The entity is required by the purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological survey indicated that
the recoverable reserves will be 2,500,000 tons and that the extraction will be completed in
five years. Relevant cost information follows:
Land 9,000,000
Exploration and development cost 1,000,000
Expected cash flow for restoration cost 1,500,000
Credit-adjusted risk free interest rate 10%
PV of 1 at 10% for 5 periods 0.62
What is the depletion charge per ton of extracted material?
A. 3.60 C. 4.00
B. 3.97 D. 4.37 FA © 2014
41. On January 1, 2014, Misnomer Company purchased land with valuable natural ore deposits
for P 10,000,000. The residual value of the land was P2,000,000. At the time of purchase, a
geological survey estimated a recoverable output of 4,000,000 tons. Early in 2014, roads
were constructed on the land to aid in the extraction and transportation of the mined ore at
a cost of Pl,600,000. In 2014, 500,000 tons were mined and sold. A new survey at the end
of 2015 estimated 4,200,000 tons of ore available for mining. In 2015, 800,000 tons were
mined and sold. What amount should be recognized as depletion expense for 2015?
A. 1,200,000 C. 1,600,000
B. 1,344,000 D. 1,920,000 FA © 2014
42. Burlesque Company purchased in 2014 a property that contained certain mineral deposits
for P9,000,000. Estimated recovery was 2,000,000 tons of deposits. Development costs of
P300,000 were also incurred in the same year. The mining property was expected to be
worth Pi,200,000 after the mineral deposits had all been removed. During 2014, the entity
extracted and sold 200,000 metric tons of minerals. Further development costs of P
135,000 were incurred in 2015 and the estimate of total recoverable deposit including the
deposits extracted in 2014 was revised to 1,850,000 metric tons. During 2015, the entity
recovered and sold 300,000 tons. What is the depletion expense for 2015?
A. 1,203,000 C. 1,350,000
B. 1,215,000 D. 1,500,000 FA © 2014
43. At the beginning of current year, Nilli Company purchased a coal mine for P30,000,000.
Removable coal is estimated at 1,500,000 tons. The entity is required to restore the land at
an estimated cost of P3,600,000. The land is estimated to have a value of P3,150,000 after
restoration. The entity incurred P7,500,000 of development cost preparing the mine for
production. During the current year, 450,000 tons were removed and 300,000 tons were
sold. What total amount of depletion should be recorded for the current year?
A. 3,870,000 C. 10,305,000
B. 7,590,000 D. 11,385,000 FA © 2014
44. In January 2014, Vanity Company purchased a mineral mine for P26,400,000 with
removable ore estimated at 1,200,000 tons. After it has extracted all the ore, the entity will
be required by law to restore the land to its original condition at an estimated cost of
P2,400,000. The present value of the estimated restoration cost is PI,800,000. The entity
believed it will be able to sell the property afterwards for P3,000,000. During the current
year, the entity incurred P3,600,000 of development costs preparing the mine for production
and removed and sold 60,000 tons of ore. What amount should be reported as depletion for
the current year?
A. 1,440,000 C. 1,500,000
B. 1,470,000 D. 1,590,000 FA © 2014
45. At the beginning of the current year, Vorst Company purchased a mineral mine for
P26,400,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the
ore, the entity will be required by law to restore the land to its original condition at an
estimated cost of P2,100,000. The present value of the estimated restoration cost is
P1,800,000. The entity believed that it will be able to sell the property afterwards for
P3,000,000. During the current year, the entity incurred P3,600,000 of development cost
preparing the mine for production, removed 80,000 tons of ore and sold 60,000 tons. What
total amount of depletion should be recorded for the current year?
A. 1,440,000 C. 1,920,000
B. 1,455,000 D. 1,940,000 P1 © 2014
46. Radical Company acquired a mineral right for P30,000,000 in January 2014. The mine has
a recoverable ore estimated at 4,000,000 tons. After it has extracted all the ore, the entity
will be required by law to restore the land to its original condition at a discounted amount of
P2,000,000. The entity believed that the property can be sold afterwards for P5,000,000.
Early in 2014, roads were constructed and other development costs were incurred to aid in
the extraction and transportation of the mined ore at a cost of P6,000,000. In 2014, 200,000
tons of ore were mined and sold. On December 31, 2015 a new survey made by a new
mining engineer indicated that 5,000,000 tons of ore were available for mining. In 2015,
225,000 tons of ore were extracted and sold. What amount of depletion expense should be
recognized for 2015?
A. 1,350,000 C. 1,650,000
B. 1,410,000 D. 1,856,250 FA © 2014
47. June Company acquired for P9,000,000 property which is believed to include mineral
deposit. Geological estimates indicate that approximately 1,000,000 tons of mineral maybe
extracted. It is further estimated that the property can be sold for P2,500,000 following
mineral extraction. The entity is legally required to restore the land to a condition
appropriate for resale at a discounted amount of P800,000. The entity extracted 50,000
tons of the mineral in the current year. After initial acquisition, the following costs were
incurred:
Exploration cost 3,500,000
Development cost related to drilling of wells 3,200,000
Development cost related to production equipment 4,600,000
What amount should be recorded as depletion for the current year?
A. 700,000 C. 825,000
B. 785,000 D. 930,000 FA © 2014
48. Farr Company quarries limestone, crushes it and sells it to be used in road building. The
entity paid P10,000,000 for a certain quarry. The property can be sold for P3,000,000 after
production ceases.
Estimated total reserves 10,000,000
Tons quarried through January 1, 2014 4,000,000
Tons quarried in 2014 1,500,000
An engineering study indicated that on January 1, 2014, 7,500,000 tons of limestone were
available. What is the depletion for 2014?
A. 840,000 C. 1,200,000
B. 1,050,000 D. 2,800,000 FA © 2014
49. Toledo Mining Company constructed a building costing P2,800,000 on the mine property.
The estimated residual value will not benefit the entity and will be ignored for purposes of
computing depreciation. The building has an estimated life of 10 years. The total estimated
recoverable output from the mine is 500,000 tons. The production of the first four years of
operations was:
First year 100,000 tons
Second year 100,000 tons
Third year Shut down, no output
Fourth year 100,000 tons
What is the depreciation for the fourth year?
A. 210,000 C. 490,000
B. 336,000 D. 560,000 P1 © 2014
50. In January 2014, Huff Mining Company purchased a mineral mine for P36,000,000 with
removable ore estimated by geological survey at 2,160,000 tons. The property has an
estimated value of P3,600,000 after the ore has been extracted. The entity incurred
P10,800,000 of development cost preparing the property for the extraction of ore. During
2014, 270,000 tons were removed and 240,000 tons were sold. For the year ended
December 31, 2014, what amount of depletion should be included in cost of goods sold?
A. 3,600,000 C. 4,800,000
B. 4,050,000 D. 5,400,000 FA © 2014
51. Catherine Company acquired a coal mine at a cost of P25,000,000. Intangible development
costs totaled P6,000,000. After extraction has occurred, the entity must restore the property
and the estimated fair value of the obligation is P3,000,000. The property can be sold for
P8,500,000 after restoration. The entity estimated that 500,000 tons of coal can be
extracted. The entity extracted 90,000 tons in the first year. Which of the following would be
included in the journal entry to record depletion?
A. Debit inventory P4,590,000
B. Credit inventory P4,500,000
C. Debit accumulated depletion P4,590,000
D. Credit accumulated depletion P6,120,000 FA © 2014
52. ABC Company provided the following balances at the end of the current year:
Wasting asset, at cost 80,000,000
Accumulated depletion 20,000,000
Capital liquidated 15,000,000
Retained earnings 10,000,000
Depletion based on 100,000 units extracted at P50 per unit 5,000,000
Inventory of resource deposit (20,000 units) 2,000,000
What is the maximum dividend that can be declared at the end of current year?
A. 10,000,000 C. 15,000,000
B. 14,000,000 D. 30,000,000 P1 © 2014
Questions 53 & 54 are based on the following information. FA © 2014

In 2013, Lepanto Mining Company purchased property with natural resources for P28,000,000.
The property had a residual value of P5,000,000.
However, the entity is required to restore the property to the original condition at a
discounted amount of P2,000,000.
In 2013, the entity spent PI,000,000 in development cost and P3,000,000 in building on the
property.
The entity does not anticipate that the building will have utility after the natural resources
are removed.
In 2014, an amount of PI,000,000 was spent for additional development on the mine.
The tonnage mined and estimated remaining tons for years 2013 to 2015 are as follows:
Tons extracted Tons remaining
2013 0 10,000,000
2014 3,000,000 7,000,000
2015 3,500,000 2,500,000
53. What amount should be recognized as depletion for 2014?

A. 6,900,000 C. 8,400,000
B. 8,100,000 D. 9,600,000

A. 9,450,000 C. 11,025,000
B. 10,150,000 D. 15,750,000

Canyon Company purchased in 2014 a property that contained certain mineral deposits for
P9,000,000. Estimated recovery was 1,000,000 tons of deposits. Development cost of P300,000
was also incurred in the same year. The mining property was expected to be worth P1,200,000
after the mineral deposits had all been removed.

During 2014, the entity extracted and sold 200,000 metric tons of minerals. Further development
cost of P945,000 was incurred in 2015 and the estimate of total recoverable deposit including the
amount extracted in 2014 was revised to 1,850,000 metric tons. During 2015, the entity
recovered and sold 300,000 tons.
55. What amount should be recorded as depletion for 2014?

A. 1,560,000 C. 1,800,000
B. 1,620,000 D. 1,860,000

A. 1,179,000 C. 1,350,000
B. 1,203,000 D. 2,430,000

On January 1, 2014, Mankayan Company purchased land with valuable natural ore deposits for
P10,000,000. The residual value ofthe land was P2,000,000. At the time of purchase, a
geological survey estimated a recoverable output of 4,000,000 tons. Early in 2014, roads were
constructed on the land to aid in the extraction and transportation of the mined ore at a cost of
P1,600,000. In 2014, 500,000 tons were mined. A new survey at the end of 2015 estimated
4,200,000 tons of ore available for mining., In 2015, 800,000 tons were mined and sold.

A. 1,000,000 C. 1,250,000
B. 1,200,000 D. 1,450,000

A. 1,200,000 C. 1,600,000
B. 1,344,000 D. 1,920,000
Depletion & Depreciation

Questions 59 and 60 are based on the following information. P1 © 2014
On July 1, 2014, Lam Company, a calendar year corporation, purchased the rights to a mine. The
total purchase price was P16,400,000, of which P2,000,000 was allocable to the land. Estimated
reserves were 1,800,000 tons. The entity expects to extract and sell 25,000 tons per month. The
entity purchased new equipment on July 1,2014. The equipment cost P7,500,000 and had a
useful life of 8 years. However, after all the resource is removed, the equipment will be of no use
and will be sold for P300,000.

A. 1,200,000 C. 2,400,000
B. 1,366,500 D. 2,733,000
60. What amount should be recorded as depreciation of the mining equipment for 2014?
A. 300,000 C. 900,000
B. 600,000 D. 1,450,000
Questions 61 & 62 are based on the following information.

On July 1, 2014, Lethargic Company, a calendar year entity, purchased the rights to a mine. The
total purchase price was P14,000,000, of which P2,000,000 was allocable to the land. Estimated
reserves were 1,500,000 tons. The entity expects to extract and sell 25,000 tons per month.
The entity purchased new equipment on July 1, 2014. The equipment was purchased for
P8,000,000 and had a useful life of 8 years. However, after all the resource is removed, the
equipment will be of no use and will be sold for P500,000.
61. What is the depletion for 2014?

A. 1,200,000 C. 1,950,000
B. 1,400,000 D. 2,400,000
62. What is the depreciation of the equipment for 2014?

A. 468,750 C. 750,000
B. 500,000 D. 937,500
Questions 63 thru 66 are based on the following information. P1 © 2014

In 2011, Sunflower Company acquired a silver mine in Eastern Mindanao. Because the mine is
located deep in the Mindanao frontier, the entity was able to acquire the mine for the low price of
P50,000.
In 2012, the entity constructed a road to the silver mine costing P5,000,000. Improvements and
other development costs made in 2012 cost P750,000. Because of the improvements to the
mine and to the surrounding land, it is estimated that the mine can be sold for P600,000 when
mining activities are complete.
During 2013, five buildings were constructed near the mine 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. Geologists estimated that 4,000,000 tons of silver ore could be removed from the
mine for refining.
During 2014, the first year of operations, only 500,000 tons of silver ore were removed from the
mine. However, in 2015, 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 costs of P1,300,000 were made to the mine early in 2015 to facilitate the removal
of the additional silver. Early in 2015, an additional building was constructed at a cost of
P375,000 to house the additional workers needed to excavate the added silver. This building is
not expected to have any residual value.

A. 643,750 C. 718,750
B. 650,000 D. 725,000

A. 700,000 C. 1,300,000
B. 900,000 D. 1,525,000
65. What is the depreciation of buildings for 2014?

A. 225,000 C. 318,750
B. 250,000 D. 343,750
66. What is the depreciation of buildings for 2015?

A. 290,000 C. 450,000
B. 300,000 D. 500,000
Questions 67 thru 70 are based on the following information. P1 © 2014

On January 1, 2013, Samar Company paid P5,400,000 for property containing natural resource
of 2,000,000 tons of ore. The present value of the estimated cost of restoring the land after the
resource is extracted is P450,000 and the land will have a value of P650,000 after it is restored
for suitable use.
Tunnels, bunk houses and other fixed installations are constructed at a cost of P8,000,000 and
such expenditures are charged to mine improvements.
Operations began on January 1,2014 and resources removed totaled 600,000 tons. During 2015,
a discovery was made indicating that available resource after 2015 will total 1,875,000 tons.
At the beginning of 2015, additional bunk houses were constructed in the amount of P770,000. In
2015, only 400,000 tons were mined because of a strike.
A. 1,425,000 C. 1,620,000
B. 1,560,000 D. 1,755,000

A. 640,000 C. 1,040,000
B. 776,000 D. 1,560,000
69. What amount should be recorded as depreciation for 2014?
A. 500,000 C. 1,200,000
B. 1,000,000 D. 2,400,000
70. What amount should be recorded as depreciation for 2015?

A. 1,120,000 C. 1,600,000
B. 1,360,000 D. 2,400,000
Journal entries
71. In 2006, Jannine Company purchased a tract of land as a possible future plant site. In
January 2014, valuable sulphur deposits were discovered on adjoining property and the
entity immediately began exploration on the property. In December 2014, after incurring
P2,000,000 in exploration costs, which were accumulated in an expense account, the entity
discovered sulphur deposits appraised at PI 2,000,000 more than the value of the land.
What is the journal entry to record the discovery of the sulphur deposits?
A. Make no entry
B. Debit P2,000,000 to an asset account
C. Debit P12,000,000 to an asset account
D. Debit P14,000,000 to an asset account P1 © 2014
72. Catherine Company acquired a coal mine at a cost of P25,000,000. Intangible development
costs totaled P6,000,000. After extraction has occurred, the entity must restore the property
and the estimated fair value of the obligation is P3,000,000. The property can be sold for
P8,500,000 after restoration. The entity estimated that 500,000 tons of coal can be
extracted. The entity extracted 90,000 tons in the first year. Which of the following would be
included in the journal entry to record depletion?
A. Debit inventory P4,590,000
B. Credit inventory P4,500,000
C. Debit accumulated depletion P4,590,000
D. Credit accumulated depletion P7,650,000 P1 © 2014
ANSWER KEY THEORY

1.C 26.C 51.C
2.B 27.D 52.A
3.D 28.D 53.C
4.B 29.D 54.D
5.D 30.A 55.D
6.D 31.B 56.C
7.A 32.B 57.D
8.C 33.A 58.C
9.C 34.A 59.D
10.D 35.D 60.D
11.B 36.A 61.C
12.C 37.B 62.C
13.D 38.C 63.D
14.C 39.D 64.C
15.B 40.B
16.D 41.D
17.D 42.D
18.D 43.D
19.C 44.C
20.B 45.D
21.B 46.D
22.C 47.B
23.D 48.D
24.A 49.D
25.A 50.B
Answer Key Page 45

ANSWER KEY PROBLEMS

1.B 26.C 51.A
2.C 27.C 52.B
3.C 28.C 53.B
4.C 29.B 54.C
5.A 30.C 55.B
6.C 31.C 56.C
7.B 32.C 57.B
8.B 33.C 58.B
9.B 34.C 59.A
10.C 35.A 60.B
11.B 36.C 61.A
12.C 37.B 62.C
13.C 38.A 63.B
14.B 39.C 64.B
15.B 40.D 65.A
16.B 41.B 66.D
17.A 42.C 67.B
18.C 43.D 68.A
19.B 44.A 69.D
20.B 45.C 70.A
21.B 46.A 71.B
22.C 47.A 72.A
23.C 48.A
24.B 49.C
25.C 50.C
Answer Key Page 46

ANSWER EXPLANATION
1. Answer is (B).
Rate per unit (8,100,000 - 600,000 / 25,000 units) 300
Depreciation for 2015 (7,000 x 300) 2,100,000
2. Answer is (C).
Cost (5,000,000 + 50,000 + 150,000) 5,200,000
Accumulated depreciation - December 31, 2015 (17,000 hours x 52) 884,000
Carrying amount - December 31, 2015 4,316,000
Rate per hour (5,200,000/100,000) 52
3. Answer is (C).
Invoice price 4,500,000
Cash discount (2% x 4,500,000) (90,000)
Delivery cost 80,000
Installation and testing 310,000
Total cost 4,800,000
Residual value (800,000)
Depreciable amount 4,000,000
Rate per unit (4,000,000/200,000) 20
Depreciation for 2014 (30,000 x 20) 600,000
Accumulated depreciation – December 31, 2015 1,560,000
4. Answer is (C).
Accumulated depreciation - 2015 5,000,000
Accumulated depreciation-2014 3,875,000
Annual depreciation 1,125,000
Average life (25,000,000 - 2,500,000) /1,125,000) 20
5. Answer is (A).
Cost of machinery 1,100,000
Residual value ( 50,000)
Straight line depreciation (1,050,000/10) 105,000
If an asset is acquired by installment, the cost is equal to the cash price or present value of
future payments. The difference between the total payments and cash price is an interest
expense.
Answer Explanation & Solutions Page 47

Down payment 100,000

Monthly payments (50,000x24) 1,200,000
Total cash payments 1,300.000
Cash price (1,100.000)
Interest expense 200,000
6. Answer is (C).
Original life (100% / 25%) 4 years
Years expired on October 1, 2014 2 .
Remaining life 2 .
Depreciation on original cost (2,500,000 x 25%) 625,000

Depreciation on improvement (500,000 / 2) 250,000
Total depreciation for year ended September 30, 2015 875,000
7. Answer is (B).
Sale price 2,300,000
Carrying amount of machine:
Cost 2012 4,200,000
Accum. deprn. -12/31/2014 (4,200,000-600,000 /5 x 3) 2,160,000 2,040,000
Gain on disposal 260,000
No depreciation is recognized from January 1 to June 30,2014 because the depreciation
policy is that no depreciation is taken in the year of disposition.
8. Answer is (B).
Cost -April 1, 2009 2,000,000
Accumulated depreciation - 9/30/2014:
2010 (2,000,000 - 200,000)/9 200,000
2011 200,000
2012 200,000
2013 200,000
2014 200,000 1,000,000
Carrying amount 1,000,000
No depreciation was recognized in 2009 because the depreciation policy is no depreciation
in the year of acquisition.
Sale price 1,100,000
Gain on disposal 100,000

9. Answer is (B).
Cost of old engine 6,000,000
Accumulated depreciation 4,000,000
PAS 16, paragraph 67, provides that the "carrying amount" of an item of property, plant and
equipment shall be derecognized on disposal.
10. Answer is (C). Depreciation (6,500,000-700,000/10) 580,000
11. Answer is (B).

Residual Depreciable Annual
Cost Value amount Life depreciation
A 5,500,000 500,000 5,000,000 20 250,000
B 2,000,000 200,000 1,800,000 15 120,000
C 400,000 400,000 5 80,000
7,900,000 7,200,000 450,000
Composite life - 7,200,000 / 450,000 16 years
Composite rate = Total annual depreciation / total cost = 450,000/7,900,000 = 5.7%
12. Answer is (C).

Total cost - January 1, 2014 5,000,000
Cost of new asset acquired 2,500,000
Cost of asset sold (1,000,000)
Remaining cost - December 31,2014 6,500,000
Depreciation for 2014 (25% x 6,500,000) 1,625,000
13. Answer is (C).Under the composite method, no gain or loss is recognized on the
derecognition of an asset. The journal entry for the derecognition is:
Cash 350,000
Accumulated depreciation 650,000
Equipment 1,000,000
14. Answer is (B).

Main machine (7,500,000/10) 750,000
First component - from January 1 to April 1, 2014(1,200,000 /6 x 3 / 12) 50,000
Second component - from April 1 to December 31, 2014
(2,000,000-400,0000)/4 x 9/12 300,000
Total depreciation for 2014 1,100.000

The second component is depreciated over the remaining life of the main machine of 4
years. The original life of the main machine is 10 years and 6 years already expired.
15. Answer is (B).

Solution 47-16 Answer b
SYD =1+2 + 3 + 4 + 5 + 6 + 7 + 8 + 9+10 =55
The first three fractions are 10/55 for 2012,9/55 for 2013, and 8/55 for 2014. Thus, the 2014
depreciation of P240,000 is equal to 8/55.
Depreciable amount (240,000 / 8/55) 1,650,000
Acquisition cost 1,700,000
16. Answer is (B).

SYD =1+2 + 3 + 4 + 5 + 6 + 7 + 8
SYD = 36
October 1,2014 to September 30,2015 (8/36 x 7,200,000) 1,600,000
October 1,2015 to September 30,2016 (7/36 x 7,200,000) 1,400,000
Depreciation for 2015
January 1 to September 30,2015 (1,600,000x9/12) 1,200,000
October 1 to December 31,2015 (1,400,000 x 3/12) 350,000
1,550,000
The machinery was acquired on September 20,2014. This means that only 10 days remain
in September. Accordingly, the depreciation commenced on October 1,2014 because the
policy is that depreciation is computed on the basis of the nearest full month. If the
machinery is acquired on September 11,2014,19 days remain in September which is
nearest to full month. In this case, depreciation commences on September 1,2014.
17. Answer is (A).

The accumulated depreciation on December 31,2013 is recomputed following a certain
method. The same is arrived at following the SYD as follows:
SYD= 1+2 + 3 + 4 + 5 = 15
2011 (5/15 x 900,000) 300,000
2012 (4/15 x 900,000) 240,000
2013 (3/15 x 900,000) 180,000
Accumulated depreciation - December 31, 2013 720,000
Accordingly, the SYD is followed for 2014.
2014 depreciation (2/15 x 900,000) 120,000

18. Answer is (C).

SYD =1+2 + 34-4 + 5
SYD =15
April 1,2014 to March 31, 2015 (5/15 x 3,000,000) 1,000,000
April 1,2015 to March 31, 2016 (4/15 x 3,000,000) 800,000
Accumulated depreciation - March 31,2016 1,800,000
April 1,2014-December 31, 2014 (1,000,000 x 9/12) 750,000
January I, 2015 - March 31,2015 (1,000,000 x 3/12) 250,000

April 1,2015-December 31,2015 (800,000 x 9/12) 600,000
Total 2015 depreciation 850,000
Accumulated depreciation - December 31, 2015 (750,000 + 850,000) 1,600,000
19. Answer is (B).

SYD= 1+2 + 3 + 4 =10
Accumulated depreciation
2014 (4/10 x 4,000,000) 1,600,000
2015 (3/10 x 4,000,000) 1,200,000 2,800,000
Carrying amount - December 31, 2015 1,700,000
20. Answer is (B).

Straight line rate (100% / 8 years) 12.5%
Fixed rate (12.5x2) 25%
2014 depreciation (1,280,000 x 25%) 320,000
2015 depreciation (1,280,000 - 320,000 x 25%) 240,000
Under double declining balance, the residual value is ignored in the meanwhile.
21. Answer is (B).

Straight line rate (100% / 10 years) 10%
Fixed rate (10x2) 20%
2014 depreciation (5,000,000 x 20% x 6/12) 500,000
2015 depreciation (5,000,000 - 500,000 x 20%) 900,000
22. Answer is (C).

Fixed rate (100% / 8 years x 2) 25%
Carrying amount-1/1/2015 ( 900,000/ 25%) 3,600,000
Carrying amount- 1/1/2014 (3,600,000/ 75%) 4,800,000

23. Answer is (C).

Straight line rate (100% / 5) 20%
Fixed rate (20% x 150%) 30%
Depreciation from July 1 to Dec. 31, 2014 (6,000,000 x 30% x 6/12) 900,000
Depreciation for 2015 (6,000,000 - 900,000 x 30%) 1,530,000
24. Answer is (B).

SYD = 1+2 + 3 + 4 + 5 + 6 + 7 + 8 = 36
2014 depreciation (5,400,000x8/36) 1,200,000
2015 depreciation (5,400,000 x 7/36) 1,050,000
Accumulated depreciation- 12/31/2014 (SYD) 2,250,000
Accumulated depreciation - 12/31/2014 (SL) (5,400,000 / 8 x 2) 1,350,000
SYD greater than straight line 900,000
25. Answer is (C).

SYD= 1 + 2 + 3+4 + 5= 15
Accumulated fractions for 2011, 2012 and 2013 (5/15+4/5 + 3/15) 12/15
Cost - January 1, 2011 3,760,000
Accumulated depreciation - December 31,2013
(3,760,000 - 240,000 x 12 / 15) 2,816,000
Carrying amount - January 1, 2014 944,000
Remaining depreciable amount 592,000
Since the revised total useful life is 4 years and three years already expired, the remaining
useful life is only one year. Accordingly, the remaining depreciable amount is charged to
depreciation expense for 2014.
26. Answer is (C).

Fixed rate (100% / 4 x 2) 50%
Cost 6,000,000
Depreciation for 2014 (50% x 6,000,000) 3,000,000
Carrying amount - January 1, 2015 3,000,000
Maximum depreciation in 2015 2,400,000
Fixed rate in 2015 (100% / 2 x 2) 100%
This means that the computers should be fully depreciated in 2015. Since there is a
residual value of P600,000, the maximum depreciation for 2015 is equal to the carrying
amount of P3,000,000 minus the residual value of P600,000 or P2,400,000.

27. Answer is (C).

Original cost - January 1, 2009 7,800,000
Improvement - January 1, 2011 760,000
Accumulated depreciation - December 31, 2013
7,800,000 - 200,000 / 40 x 5 950,000
760,000/38 x 3 60,000 1,010,000
Depreciation for 2014 (7,550,000-200,000/25) 294,000
The revised total life is 30 years. Five years already expired from January 1,2009 to
January 1,2014. Thus, the remaining revised life is 25 years.
28. Answer is (C).

Sale price 605,000
Carrying amount of machine sold (SQUEEZE) (645,000)
Loss on disposal ( 40,000)
Machine sold 1,250,000

Carrying amount of machine sold 645,000
Accumulated depreciation on machine sold 605,000
Accumulated depreciation - January 1,2014 3,700,000

Depreciation for 2014 (SQUEEZE) 855,000
Total 4,555,000
Less: Accumulated depreciation on machine sold 605,000
Accumulated depreciation - December 31,2014 3,950,000
29. Answer is (B).

Straight line rate (100%/5 years) 20%
Fixed rate (20% x 2) 40%
2012 depreciation (5,000,000 x 40%) 2,000,000
2013 depreciation (3,000,000x40%) 1,200,000
Depreciation for 2014 - straight line (5,000,000-3,200,000/3) 600,000

30. Answer is (C).

SYD (1+2 + 3 + 4 + 5 + 6 + 7 + 8) 36
Cost - January 1,2012 10,000,000
Accumulated depreciation - January 1, 2014
2012 (8/36 x 9,000,000) ( 2,000,000)
2013 (7/36 x 9,000,000) ( 1,750,000)
Carrying amount - January 1,2014 6,250,000
Accumulated depreciation - January 1, 2014 3,750,000

Depreciation for 2014 (4/10 x 6,250,000 - 400,000) 2,340,000
Accumulated depreciation - December 31, 2014 6,090,000
Remaining life (6 years - 2) 4 years
SYD (1+2+3+4) 10
31. Answer is (C).

Add: Depreciation for 2015 550,000
Total 4,250,000
Less: Accumulated depreciation on property retirement (squeeze) 250,000
32. Answer is (C).

Cost-January 1, 2010 1,000,000
Accumulated depreciation on January 1, 2014 (900,000/10x4) 360,000
Carrying amount on January 1, 2014 640,000
Depreciation for 2014 (640,000 - 40,000 / 4) 150,000
Carrying amount - December 31,2014 490,000
33. Answer is (C). Under the "successful effort" method, only the exploration costs associated
with successful wells are capitalized. The exploration costs associated with "dry holes" or
unsuccessful wells are expensed immediately. Under the "full cost" method, all exploration
costs whether associated with successful wells or dry holes are capitalized.
34. Answer is ().

Project 1 3,250,000
Project 3 4,230,000
Project 4 2,400,000
Total exploration expense 9,880,000

35. 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.
36. 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.
37. Answer is (B).

Exploration and evaluation asset 2,000,000
Expenses 2,000,000
38. Answer is (A).

Cost 1,000,000
Depletable amount 800,000
Depletion in 2014 (800,000/160,000 = 5 x 20,000) (100,000)
Remaining depletable amount – January 1, 2015 700,000
Original estimate 160,000
Extracted in 2014 (20,000)
Remaining estimate 140,000
Underestimate 25,000
Adjusted estimate - January 1, 2015 165,000
Depletion rate in 2015 (700,000/165,000) 4.24
39. Answer is (C).

Depletion rate per unit (9,200,000 / 4,000,000) 2.30

40. Answer is (D).

Land cost 9,000,000
Exploration and development cost 1,000,000
Present value of expected restoration cost (1,500,000 x.62) 930,000
Depletable amount 10,930,000
Depletion rate per ton (10,930,000 / 2,500,000) 4.37
Since the entity is required by contract to restore the land to a condition suitable for
recreational use, the estimated restoration cost shall be capitalized. If an appropriate rate
is available, the amount should be discounted.
41. Answer is (B).

Production in 2015 800,000
Estimated output - December 31,2015 4,200,000
Total estimate - January 1, 2015 5,000,000
New rate in 2015 (9,600,000 - 1,200,000 / 5,000,000) 1.68

Depiction expense in 2015 (800,000 x 1.68) 1,344,000
A change in estimated output is a change in accounting estimate. A change in accounting
estimate should be accounted for currently and prospectively.
42. Answer is (C).

Development costs in 2014 300,000
Residual value 1,200,000
Rate in 2014 (8,100,000 / 2,000,000) 4,05
Depletion for 2014 (200,000 x 4.05) 810,000
Depletion in 2014 (810,000)
Balance 7,290,000
Development costs in 2015 135,000
Depletable amounts in 2015 7,425,000
Rate in 2015 (7,425,000 / 1,650,000) 4.50
Depletion for 2015 (300,000 x 4.50) 1,350,000

43. Answer is (D).

Estimated restoration cost 3,600,000
Development cost 7,500,000
Residual value (3,150,000)
Rate per ton (37,950,000 / 1,500,000) 25,30
Total depletion for current year (450,000 x 25.30) 11,385,000
44. Answer is (A).

Less: residual value 3,000,000
Rate per unit (28,800,000 / 1,200,000 24
Depletion for current year (60,000 x 24) 1,440,000
45. Answer is (C).

Estimated restoration cost at present value 1,800,000
Residual value ( 3,000,000)
Rate per unit (28,800,000/1,200,000) 24
Depletion for the current year (80,000 x 24) 1,920,000
Depletion included in cost of goods sold (60,000 x 24) 1,440,000
46. Answer is (A).

Depletion for 2014 1,650,000
Balance – 1/1/2015 31,350,000
New estimate – 12/31/2015 5,000,000
New estimated – 1/1/2015 5,225,000
Depletion for 2015 (31,350,000 / 5,225,000 x 225,000 1,350,000

47. Answer is (A).

Exploration cost 3,500,000
Development cost related to drilling of wells 3,200,000
Estimated restoration cost 800,000
Total 16,500,000
Rate per unit (14,000,000 / 1,000,000) 14
Depletion for the current year (50,000 x 14) 700,000
The development cost related to production equipment is not part of the cost of the mineral
property because it is subject to depreciation.
48. Answer is (A).

Depletable amount! 7,000,000
Accumulated depletion – Jan. 1, 2014
(7,000,000 /10,000,000 = .70 x 4,000,000) ( 2,800,000)
Remaining depletable amount - January 1,2014 4,200,000
New depletion rate (4,200,000 / 7,500,000) .56
Depletion for 2014 (1,500,000 x .56) 840,000
49. Answer is (C).

Depreciation for first year (2,800,000 / 500,000 = 5.60 x 100,000) 560,000
Cost 2,800,000
Accumulated depreciation for 2 years (560,000x2) 1,120,000
Carrying amount - beginning of third year ' 1,680,000
Depreciation for third year (1,680,000 / 8 years) 210,000
In the year of shutdown, the straight line method is used, based on the remaining life of the
asset.
Cost 2,800,000
Accumulated depreciation for 3 years (1,120,000 + 210,000) 1,330,000
Carrying amount - beginning of fourth year 1,470,000
Divide by remaining output (500,000 - 200,000) 300,000
New rate per ton 4.90
Depreciation for fourth year (100,000 x 4.90) 490,000

50. Answer is (C).

Total cost of ore property 46,800,000
Rate per ton (43,200,000 / 2,160,000) 20
Depletion for 2014 (270,000x20) 5,400,000
Depletion in cost of goods sold (240,000 x 20) 4,800,000
51. Answer is (A).

Intangible development costs 6,000,000
Rate per ton (25,500,000/500,000) 51
Depletion (90,000x51) 4,590,000
The depletion is a cost of production and therefore maybe directly debited to inventory
under perpetual system.
52. Answer is (B).

Accumulated depiction 20,000,000
Total 30,000,000
Less: Capital liquidated 15,000,000
Unrealized depletion in ending invty. (20,000 x 50) 1,000,000 16,000,000
Maximum dividend 14,000,000
Journal entry for declaration of maximum dividend

Capital liquidated 4,000,000
Dividend payable 14,000,000
At this point, the capital liquidated account has a balance of P15,000,000 plus P4,000,000
or P19,000,000. This account is presented as a deduction from total shareholders' equity.

53. Answer is (B).

Development cost - 2013 1,000,000
Development cost - 2014 1,000,000
Tons extracted in 2014 3,000,000

Remaining tons - December 31, 2014 7,000,000
Total estimated output - January 1, 2014 10,000,000
Rate in 2014 (27,000,000/10,000,000) 270

Depletion in 2014 (3,000,000 x 2.70) 8,100,000
54. Answer is (C).

Tons extracted in 2015 3,500,000
Tons remaining on December 31, 2015 2,500,000
New rate in 2015 (27,000,000 -8,100,000/6,000,000) 3.15
Depletion in 2015 (3,500,000 x 3.15) 11,025,000
55. Answer is (B).

Development cost in 2014 300,000
Residual value (l ,200,000)
Rate in 2014 (8,100,000/ 1,000,000) 8.10
Depletion in 2014 (200,000 x 8.10) 1,620,000
56. Answer is (C).

Depletion in 2014 (1,620,000)
Development cost in 2015 945,000
Depletable amount - January 1, 2015 7,425,000
Total recoverable deposit 1,850,000
Extracted in 2014 ( 200,000)

Estimated output - January 1, 2015 1,650,000

New rate in 2015 (7,425,000 / 1,650,000) 4.50
Depletion in 2015 (300,000 x 4.50) 1,350,000
57. Answer is (B).

Total 11,600,000
Residual value of land ( 2,000,000)
Rate per ton (9,600,000/ 4,000,000) 140
Depletion for 2014 (500,000 x 2.40) 1,200,000
58. Answer is (B).

Estimated output - December 31,2015 4,200,000
Total estimate - January 1, 2015 5,000,000
New rate in 2015 (9,600,000 - 1,200,000 / 5,000,000) 1.68

Depiction expense in 2015 (800,000 x 1.68) 1,344,000
A change in estimated output is a change in accounting estimate. A change in accounting
estimate should be accounted for currently and prospectively.
59. Answer is (B).

Production from July 1 to December 31, 2014 (25,000 x 6) 150,000

Depiction rate (14,400,000 /1,800,000) 8
Depiction for 2014 1,200,000
60. Answer is (B).

Production from July 1 to December 31, 2014 150,000 tons
Annual production (25,000 x 12) 300,000 tons
Estimated life of mine (1,800,000/ 300,000) 6 years
Since the life of the mine is shorter than the life of the equipment, the output method is used
in computing depreciation.
The straight line is used if the life of the equipment is shorter.

However, if the mining equipment is movable and can be used in future extractive project,
the equipment is depreciated over the useful life using the straight line method.
Equipment 7,500,000
Rate per unit (7,200,000 /1,800,000) 4
Depreciation for 2014 (150,000x4) 600,000
61. Answer is (A).

Less: residual value 2,000,000
Depletion rate (12,000,000 / 1,500,000) 8.00
Production (25,000 x 6) 150,000
Depletion for 2014 (150,000 x 8) 1,200,000
62. Answer is (C).

Production from July 1 to December 31, 2014(25,000 x 6) 150,000 tons
Annual production (25,000 x 12) 300,000 tons
Estimated life of mine (1,500,000 / 300,000) 5 years
Since the life of the mine is shorter than the life of the equipment, the output method is used
in computing depreciation.
Equipment 8,000,000
Less: Residual value 500,000
Rate per unit (7,500,000 / 1,500,000) 5.00
63. Answer is (B).

Purchase price 50,000
Road construction 5,000,000
Improvements and other development costs 750,000
Depletion rate per unit (5,200,000/4,000,000) 1.30
Depletion for 2014 (500,000 x 1.30) 650,000
64. Answer is (B).


Depletion in 2014 (650,000)
Remaining depletable amount 4,550,000
Development costs in 2015 1,300,000
Total depletable amount - January 1, 2015 5,850,000
Original estimate 4,000,000
Additional estimate 3,000,000
Total estimate 7,000,000
Extracted in 2014 (500,000)
Remaining estimate - January 1, 2015 6,500,000
New depiction rate per unit (5,850,000/6,500,000) .90
Depletion for 2015 (1,000,000 x .90) 900,000
65. Answer is (A).

Cost of buildings 2,000,000
Residual value (200,000)
Depreciation rate per unit (1,800,000/4,000,000) .45
Depreciation for 2014 (500,000 x .45) 225,000
66. Answer is (D).

Depreciation for 2014 (225,000)
Remaining depreciable amount 1,575,000
Additional building in 2015 375,000
Total depreciable amount - January 1, 2015 1,950,000
New depreciation rate per unit (1,950,000/6,500,000) .30
Depreciation for 2015 (1,000,000 x .30) 300,000
67. Answer is (B).

Cost of resource property 5,400,000
Restoration cost 450,000
DepletabIe amount 5,200,000
Depletion rate (5,200,000 / 2,000,000) 2.60
Depletion for 2014 (600,000 x 2.60) 1,560,000

68. Answer is (A).

Depletion in 2014 (1,560,000)
Remaining depletable amount 3,640,000
Estimated output after 2015 1,875,000
New depletion rate in 2015 (3,640,000 / 2,275,000) 1.60
Depletion for 2015 (400,000 x 1.60) 640,000
69. Answer is (D).

Depreciation rate (8,000,000 / 2,000,000) 4.00
Depreciation for 2014 (600,000 x 4) 2,400,000
70. Answer is (A).

Mine improvements (8,000,000 + 770,000) 8,770,000
Depreciation for 2014 ( 2,400,000)
New depreciation rate in 2015 (6,370,000 / 2,275,000) 2.80

Depreciation for 2015 (400,000 x 2.80) 1,120,000
71. Answer is (B).

Exploration and evaluation asset 2,000,000
Expenses 2,000,000
72. Answer is (A).

Intangible development costs 6,000,000
Rate per ton (25,500,000/500,000) 51
Depletion (90,000x51) 4,590,000
The depletion is a cost of production and therefore maybe directly debited to inventory
under perpetual system.

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Depreciation & Depletion

1. Explain the concept of depreciation.

Depreciation is not so much a matter of valuation as it is a matter of cost allocation in

2. Explain the "depreciation period".

3. What are the two kinds of depreciation?

Essay Questions Page 1

e. Disease - is applicable to animals and wooden buildings.

2. Functional or economic depreciation arises from technical obsolescence or inadequacy

Obsolescence may arise from the following:

4. Explain the three factors of depreciation.

In order to properly compute the amount of depreciation to be charged as expense during

5. Explain "depreciable amount".

MCQ – Theory: Depreciation Page 2

6. Explain "residual value".

7. Explain "useful life" of an asset.

Essay Questions Page 3

9. What are the methods of depreciation?

10. Explain the "straight line" method of depreciation.

The formula for the computation is as follows:

MCQ – Theory: Depreciation Page 4

11. Explain the "composite method" and "group method" of depreciation.

12. What are the "variable charge" methods of depreciation?

Essay Questions Page 5

b. There is a direct relationship between utilization of assets and realization of revenue.

13. Explain the "working hours" method of depreciation.

14. Explain the output or production method of depreciation.

15. What are the decreasing or accelerated methods of depreciation?

The decreasing charge methods are as follows:

16. Explain the "sum of years' digits" method.

MCQ – Theory: Depreciation Page 6

17. Explain the "declining balance" method.

18. Explain the "double declining balance" method of depreciation.

19. Explain the inventory method of depreciation.

20. Explain the retirement and replacement method of depreciation.

Under the retirement method of depreciation, no depreciation is recorded until the

Essay Questions Page 7

cost of the asset retired, minus salvage proceeds.

Exploration & Evaluation of Mineral Resources & Depletion

22. Give examples of exploration and evaluation expenditures.'

1. Acquisition of rights to explore

Expenditures related to development of mineral resources, for example, preparation for

MCQ – Theory: Depreciation Page 8

23. What is the treatment of exploration and evaluation expenditures?

24. Explain the impairment of exploration and evaluation asset.

25. Define "wasting assets".

26. What is the cost of a wasting asset?

Entities follow a wide variety of practices in accounting for an extractive industry. At

Essay Questions Page 9

27. Explain the "acquisition cost" of a wasting asset.

28. Explain "exploration cost" of a wasting asset.

The exploration cost may be accounted for following:

MCQ – Theory: Depreciation Page 10

30. Explain the "development cost" of a wasting asset.

31. Explain briefly tangible equipment and intangible development cost.

Tangible equipment includes transportation equipment, heavy machinery, tunnels, bunker

32. Explain the "estimated restoration cost" of a wasting asset.

33. What is the concept of depletion?

Depletion is the removal, extraction or exhaustion of a natural resource or wasting asset.