CHAPTER 58

DEPLETION
Basic problems

Problem 58-1 (AICPA Adapted)

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. 1,920,000
b. 1,440,000
c. 1,940,000
d. 1,455,000

Solution 58-1 Answer a

Acquisition cost 26,400,000
Development cost 3,600,000
Estimated restoration cost at present value 1,800,000
Total cost 31,800,000
Residual value (3,000,000)
Depletable amount 28,800,000

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

Problem 58-2 (AICPA Adapted)

At the beginning of current year, 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 the current year, 270,000 tons were removed and 240,000 tons were sold.

What amount of depletion should be included in cost of goods sold for the current year?
a. 3,600,000
b. 4,050,000
c. 4,800,000
d. 5,400,000

Solution 58-2 Answer c

Purchase price 36,000,000
Development cost 10,800,000
Total cost of ore property 46,800,000
Residual value (3,600,000)
Depletable amount 43,200,000

Rate per ton (43,200,000/2,160,000) 20

Total depletion for the year (270,000 x 20) 5,400,000

Depletion in cost of goods sold (240,000 x 20) 4,800,000

Problem 58-3 (IAA)

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 may be extracted.

It is further estimated that the property can be sold for P2,500,000 following mineral extraction.

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
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.

What amount should be recorded as depletion for the current year?

a. 825,000
b. 930,000
c. 700,000
d. 785,000

Solution 58-3 Answer c

Acquisition cost 9,000,000
Exploration cost 3,500,000
Development cost related to drilling of wells 3,200,000
Estimated restoration cost 800,000
Total 16,500,000
Residual value (2,500,000)
Depletable amount 14,000,000

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.

Problem 58-4 (IAA)

On February 20, 2018, Genoa Company incurred cost a P36,000,000 to acquire and prepare to
extract an estimate 4,000,000 tons of mineral deposits. The entity mined 500,000 to of ore in
2018.

On December 31, 2019, Geologists estimated that 3,000,000 tons of ore still remained. The entity
mined 600,000 tons of ore in 2019

1. What is the depletion for 2018?

a. 4,500,000
b. 2,250,000
C. 6,000,000
d. 3,000,000

2. What is the depletion for 2019?

a. 5,250,000
b. 6,300,000
C. 7,200,000
d. 6,000,000

Solution 58-4
Question 1 Answer a

Rate per ton (36,000,000 / 4,000,000) 9.00

Depletion for 2018 (500,000 x 9) 4,500,000

Question 2 Answer a
Cost 36,000,000
Depletion for 2018 (4,500,000)
Remaining depletable amount 31,500,000
Estimated tons - December 31, 2019 3,000,000
Extracted in 2019 600,000
New estimate - January 1, 2019 3,600,000
New rate per ton (31,500,000 /3,600,000) 8.75
Depletion for 2019 (600,000 x 8.75) 5,250,000

Problem 58-5 (IAA)

On March 31, 2018, Mariel Company purchased the right to remove gravel from an old rock
quarry. The gravel is to be sold as roadbed for highway construction.

The cost of the quarry right was P1,640,000 with estimated salable rock of 200,000 tons. During
2018, the entity loaded and sold 40,000 tons of rock.

On January 1, 2019, the entity estimated that 200,000 tons still remained. During 2019, the entity
loaded and sold 80,000 tons.
1. What is the depletion for 2018?
a. 410,000
b. 328,000
c. 307,500
d. 246,000

2. What is the depletion for 2019?

a. 540,000
b. 656,000
c. 524.800
d. 557,600

Solution 58-5
Question 1 Answer b
Rate per ton (1,640,000/200,000) 8.20
Depletion for 2018 ( 40,000 x 8.20) 328,000

Question 2 Answer c
Cost of rock quarry 1,640,000
Depletion for 2018 (328,000)

Remaining depletable amount 1,312,000

New rate per ton (1,312 / 200,000) 6.56

Depletion for 2019 (80,000 x 6.56) 524,800

Problem 58-6 (AICPA Adapted)

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, 2018 4,000,000
Tons quarried in 2018 1,500,000

An engineering study indicated that on January 1, 2018, 7,500,000 tons of limestone were
available.
What is the depletion for 2018?
a. 1,050,000
b. 2,800,000
c. 1,200,000
d. 840,000

Solution 58-5. Answer d

Acquisition cost 10,000,000
Residual value ( 3,000,000)
Depletable amount 7,000,000
Accumulated depletion - January 1, 2018
(4,000,000 x 70) ( 2,800,000)

Remaining depletable amount - January 1, 2018 4,200,000

Original depletion rate

(7,000,000 / 10,000,000 units) .70

New depletion rate (4,200,000/7,500,000) .56

Depletion for 2018 (1,500,000 x .56) 840,000

Problem 58-7 (IAA)

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 2018, and by the end of the year, 20,000 tons had been recovered
and sold.

In 2019, geological studies indicated that the total amount of mineral deposits had been
underestimated by 25,000 tons.

During 2019, 30,000 tons were extracted and 28,000 tons were sold.
What is the depletion rate per ton in 2019?
a. 4.24
b. 4.32
c. 4.85
d. 5.19

Solution 58-7 Answer a

Cost 1,000,000
Residual value ( 200,000)
Depletable amount 800,000
Depletion in 2018 (20,000 x 5) ( 100,000)
Remaining depletable amount - January 1, 2019 700,000

Depletion rate in 2018 (800,000 / 160,000) 5.00

Original estimate 160,000

Extracted in 2018 (20,000)
Remaining estimate 140,000
Underestimate 25,000
Adjusted estimate - January 1, 2019 165,000

Depletion rate in 2019 (700,000/165,000) 4.24

Problem 58-8 (AICPA Adapted)

Crowder 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
recreation use after it has extracted the natural resource.

Geological survey estimated that the recoverable reserves would be 2,500,000 tons and that the
land has a value of P500,000 after restoration,

Land 4,500,000
Estimated restoration cost 750,000

If Crowder maintains no inventory of extracted material, what should be the charge to depletion
expense per ton of extracted material?
a. 1.80
b. 1.60
c. 1.90
d. 2.10

Solution 58-8 Answer c

Land purchase price 4,500,000
Estimated restoration cost 750,000
Total cost 5,250,000
Residual value (500,000)
Depletable amount 4,750,000

Rate per ton (4,750,000/2,500,000) 1.90

Problem 58-9 (AICPA Adapted)

Canon Company purchased a coal mine for P2,000,000. An amount of P500,000 was incurred to
prepare the coal mine for extraction of the coal.

It was estimated that 750,000 tons of coal would be extracted from the mine during the useful
life.

The entity planned to sell the property for P100,000 at the end of the useful life.

During the current year, 15,000 tons of coal were extracted and sold.

What would be the depletion amount per ton for the current year?
a. 3.30
b. 2.60
c. 3.20
d. 2.50

Solution 58-9 Answer c

Purchase price 2,000,000
Development cost 500,000
Total cost 2,500,000
Residual value (100,000)
Depletable amount 2,400,000
Rate per ton (2,400,000 / 750,000) 3.20
Problem 58-10 (IAA)
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 would 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. 4.00
b. 4.37
c. 3.97
d. 3.60

Solution 58-10 Answer b

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 of estimated restoration cost should be

discounted.
Problem 58-11 (AA)
Zeus Company paid P200,000 for the right to mine lead in Southeast Mindanao. The cost to drill
and erect a mine shaft was P2,400,000 and equipment to process the lead ore before shipment
to the smelter was P1,800,000. The mine is expected to yield 2,000,000 tons of ore during the
five years it is expected to be operating.

The equipment is salvagable and is expected to be worth P200,000 when mining is concluded.
The mine started operations on April 30, 2018. In 2018,300,000 tons of ore were extracted.

1. What is the depletion for 2018?

a. 390,000
b. 195,000
c. 520,000
d. 260,000

2. What is the depreciation for 2018?

a. 240,000
b. 120,000
C. 320,000
d. 160,000

Solution 58-11
Question 1 Answer a
Cost of right 200,000
Cost to drill and erect a mine shaft 2,400,000
Total cost of mining right 2,600,000
Depletion for 2018
(2,600,000/2,000,000=1.30 x 300,000) 390,000

Question 2 Answer a
Depreciation rate (1,800,000 - 200,000/2,000,000) 0.80
Depreciation of equipment (300,000x.80) 240,000

Problem 58-12 (AICPA Adapted)

On July 1, 2018, 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 expected to extract and sell 25,000 tons per
month.

The entity purchased new equipment on July 1, 2018 for P7,500,000. The equipment had a useful
life of 8 years.

However, after all the resource is removed, the equipment would be of no use and could be sold
for P300,000.

1. What amount should be recorded as depletion for 2018?

a. 1,200,000
b. 2,400,000
c. 1,366,500
d. 2,733,000

2. What amount should be recorded as depreciation of the mining equipment for 2018?
a. 450,000
b. 900,000
c. 600,000
d. 300,000

Solution 58-12

Question 1 Answer a

Purchase price 16,400,000

Residual value (2,000,000)
Depletable amount 14,400,000

Production from July 1 to December 31, 2018

(25,000 x 6) 150,000
Depletion rate (14,400,000 / 1,800,000) 8
Depletion for 2018 1,200,000

Question 2 Answer c
Production from July 1 to December 31, 2018 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
Residual value (300,000)
Depreciable amount 7,200,000

Rate per unit (7,200,000 / 1,800,000) 4

Depreciation for 2018 (150,000 x 4) 600.000

Problem 58-13 (IAA)

Surigao Company operates a copper mine in Central Mindanao. The entity paid P5,000,000 in
2018 for the mining site and spent an additional P3,000,000 to prepare the mine for extraction of
the copper.

After the copper is extracted in approximately four years, the entity is required to restore the
land to its original condition after which the land can be sold for P1,000,000.

The cash outflow possibility for the restoration cost is P2,000,000. The credit adjusted risk-free
rate of interest is 10%. The present value of 1 at 10% for 4 periods is 0.68.

To aid extraction, the entity purchased new equipment on July 1, 2018 for P3,000,000 with useful
life of 5 years.

After the copper is removed from this mine, the equipment will be sold for an estimated residual
amount of P200,000.

The entity expects to extract 4,000,000 tons of copper from the mine.

Actual production was 500,000 tons in 2018 and 450,000 tons were sold in 2018.
1. What is the depletion for 2018?
a. 1,170,000
b. 1,045,000
c. 1,250,000
d. 1,125,000

2. What is the depreciation for 2018?

a. 315,000
b. 350,000
C. 300,000
d. 280,000

Solution 58-13
Question 1 Answer b
Purchase price 5,000,000
Development cost 3,000,000
Estimated restoration cost (2,000,000 x 0.68) 1,360,000
Total cost 9,360,000
Land value (1,000,000)
Depletable amount 8,360,000

Depletion rate (8,380,000 74,000,000) 2.09

Depletion for 2018 (500,000 x 2.09) 1,045,000

Depletion included in cost of goods sold

(450,000 x 2.09) 940,500

Question 2 Answer b
Equipment 3,000,000
Residual value (200,000)

Depreciable amount 2,800,000

Depreciation rate (2,800,000/4,000,000) 0.70

Depreciation for 2018 (500,000 x 0.70) 350,000