Chapter 17

Depletion of Mineral Resources

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. FALSE
5. TRUE
6. TRUE
7. TRUE
8. TRUE
9. FALSE
10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. B
2. C
3. D
4. C
5. C
6. D

7. Solutions:
ar rc y

Requirement (a):
rs vi as
500,000 + 500,000 = 1,000,000 x 500/2,000= 250,000
sh u tud
ou ed e w

Requirement (b):
250,000 x (300,000 oz. sold / 500,000 oz. extracted) = 150,000
s

8. Solution:
 (10M – 3M) x 6/10 + 3M = 4,500,000 carrying amount on Jan. 1, 20x3;
re is

eH a

 (4.5M – 3M residual value) = 4.2M new depletion base x 1.5M/7.5M =

840,000
Th

9. Solutions:
o

Requirement (a):
(13.2M – 400K) x [(25K x 6 months) / 1.6M] = 1,200,000
s

Requirement (b):
 1,600,000 / (25,000 x 12mos.) = 5.33 years life of the mine
 5.33 years life of the mine vs. 8-year life of equipment

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  Since the life of the mine is shorter than the life of the equipment, the
output method is used in computing depreciation.

 (6.6M – 200K)/ x [(25K x 6 months) / 1.6M] = 600,000

PROBLEM 3: EXERCISE
1. Solution:

Acquisition costs .................................... ₱5,600,000

Restoration costs .................................... 800,000
Residual value--land ................................. (640,000)
Development costs .................................... 560,000
Building ............................................. 88,000
Salvage value--building .............................. (8,000)
₱6,400,000
₱6,400,000/4,000,000 tons = ₱1.60 per ton

2001: 700,000 tons x ₱1.60 = ...................... ₱1,120,000

2002: Original cost ............................... ₱6,400,000

Additional costs--2002 ...................... 272,000
6,672,000
Estimated depletion--2001 ................... (1,120,000)
Balance subject to depletion ................ ₱5,552,000

₱5,552,000/3,300,000 tons = ₱1.68 per ton (rounded)

900,000 tons x ₱1.68 = .............................. ₱1,512,000
ar rc y
rs vi as
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eH a
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s o

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 PROBLEM 4: CLASSROOM ACTIVITY

Solutions:

Requirement (a):
Answer: February 14, 20x1 to July 1, 20x3.

Requirement (b):

20x1 to 20x3

Deferred exploration costs – Site A 1,970,000,000

Cash 1,970,000,000
to record the exploration costs as exploration and evaluation assets (in
accordance with the Company’s policy)

Deferred exploration costs – Site B 2,020,000,000

Cash 2,020,000,000

Site A Site B
(in , (in ,
000,000s) 000,000s)
Property rights 1,000 1,200
License and legal fees 60 90
Submersible pumps 560 450
Other exploration costs 350 280
Deferred exploration costs 1,970 2,020

July 1, 20x3
ar rc y
rs vi as
sh u tud

Exploration expense – Site B 2,020,000,000

Deferred exploration costs – Site B 2,020,000,000
ou ed e w

to charge as expense the deferred exploration costs on Site B where no

mineable ore has been discovered
s
re is

Mine development costs – Site A 1,970,000,000

eH a

Deferred exploration costs – Site A 1,970,000,000

to reclassify the deferred exploration costs in Site A to mine development
Th

costs
o

Mine development costs – Site A 1,100,000,000

s

Cash 1,000,000,000
to record subsequent intangible development costs

Cash 200,000,000
Mine development costs – Site A 200,000,000

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 to record the income generated during the development phase as reduction
to the capitalized mine development costs

Dec. 31, 20x3

Mine and mining properties – Site A 2,914,770,000
Mine development costs – Site A 2,870,000,000(a)
Provision for decommissioning costs 44,770,000
to reclassify the capitalized mine development costs to mine and mining
properties, which shall be subsequently subjected to depletion
(a)
(1,970,000,000 + 1,100,000,000 – 200,000,000) = 2,870,000

Dec. 31, 20x4

Inventory (Depletion) 614,249,400
Accumulated depletion (2,914,770,000 x 22%) 614,249,400
to recognize the depletion charge for the period

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. B 6. A
2. A 7. D
3. A 8. C
4. D 9. D
5. C 10. A
ar rc y
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 PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. B
Solution:

Purchase cost of mine 2,640,000

PV of restoration costs 180,000
Development costs 360,000

Residual value (300,000)

Depletion base 2,880,000

Estimated reserves 1,200,000

Depletion rate 2
Actual tons extracted 60,000
Depletion 144,000

2. C

Purchase cost of mine 7,200,000

Development costs 2,160,000

Residual value (720,000)

Depletion base 8,640,000

Estimated reserves 4,320,000

ar rc y

Depletion rate 2
rs vi as
Tons sold 480,000
sh u tud

Depletion in COGS 960,000

ou ed e w

3. A
s

Solution:
1,000,00
re is

Purchase cost of mine 0

eH a

(100,000
Th

Accumulated depletion - 1/1/x3 )

900,00
o

Carrying amount - 1/1/x3 0

s

(200,000
Residual value )
Revised depletion base - 1/1/x3 700,000
Revised estimate of reserves a 165,000
Revised depletion rate - 20x3 4.24

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 a
The revised estimate of reserves is computed as follows:
Original estimate of reserves 160,000
Understatement of total estimate 25,000
Tons extracted in 20x2 (20,000)
Remaining reserves - 1/1/x3 165,000

4. C
Solution:
Retained earnings 600,000
Cash dividends declared (800,000)
Liquidating dividends (200,000)

5. B (₱9M + ₱1.5M – ₱1M) ÷ 2.5M tons = 3.8

ar rc y
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