CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

DEPRECIATION AND DEPLETION

1. An entity provided the following schedule of machinery:

Total cost Residual value Useful life
Machine A 5,500,000 500,000 20
Machine B 2,000,000 200,000 15
Machine C 400,000 5
What is the composite life of these assets?
a. 13.3
b. 16.0
c. 18.0
d. 19.8

2. An entity used the composite method of depreciation based on a 25% composite rate. On January 1,
2021, the total cost of equipment was P5,000,000 with total residual value of P600,000 and
accumulated depreciation of P3,000,000. In January 2021, the entity purchased an equipment for
P2,500,000 with no residual value. On December 31, 2021, the entity sold an equipment costing
P1,000,000 for P350,000. The said equipment was acquired on January 1, 2019 with residual value of
P200,000. What amount of depreciation should be recognized for 2021?
a. 1,625,000
b. 1,875,000
c. 1,525,000
d. 1,000,000

3. On April 1, 2021, an entity purchased machinery for P3,300,000. The machinery had an estimated
useful life of five years with residual value of P300,000. Depreciation was computed by the sum of
the years’ digits method. What is the depreciation for 2022?
a. 850,000
b. 800,000
c. 600,000
d. 700,000

4. An entity purchased equipment on January 1, 2021 for P5,000,000. The equipment had a useful life
of 5 years and residual value of P600,000. The policy is to depreciate 5-year asset using the 200%
double declining method for the first 2 years and then switch to straight line. What amount should
be reported as accumulated depreciation on December 31, 2023?
a. 3,000,000
b. 3,800,000
c. 3,920,000
d. 3,600,000

5. An entity takes a full year depreciation in the year of acquisition and no depreciation in the year of
disposition. Data relating to a depreciable asset on December 31, 2020 are cost P5,500,000,
residual value P1,000,000, accumulated depreciation P3,600,000 and useful life 5 years. The asset
was acquired on July 1, 2018. Using the same depreciation method in 2018, 2019 and 2020, what
amount of depreciation should be recorded in 2021?
a. 1,100,000
b. 1,200,000
c. 900,000
d. 600,000

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6. On January 1, 2021, an entity 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 the original condition at an estimated cost of P2,100,000. The present value of
the estimated restoration cost is P1,800,000. The property can be sold afterwards for P3,000,000.
During 2021, the entity incurred P2,000,000 exploration cost and P1,600,000 development cost
preparing the mine for production. The entity removed 100,000 tons of ore and sold 90,000 tons of
ore in the current year. What amount of depletion should be included in cost of goods sold for the
current year?
a. 2,400,000
b. 2,160,000
c. 2,182,500
d. 2,385,000
7. In 2021, an entity purchased property with mineral resources for P28,000,000. The property had a
residual value of P4,000,000. During 2021, an amount of P3,000,000 was spent for roads and other
improvements to aid in the extraction of the resources. Tunnels, bunk houses and other fixed
installations were also constructed at a cost of P8,000,000. The entity spent P1,000,000 in
development cost and P4,000,000 in exploration cost. Production began in 2022 and the tons
extracted totaled 3,000,000 in 2022 and 2,500,000 in 2023. The remaining tons totaled 7,000,000
on December 31, 2022 and 5,500,000 on December 31, 2023.
1. What amount of depletion should be recognized in 2022?
a. 12,000,000
b. 10,800,000
c. 9,600,000
d. 8,700,000
2. What amount of depletion should be reported for 2023?
a. 7,000,000
b. 6,350,000
c. 8,750,000
d. 7,875,000
8. On July 1, 2021, an entity purchased the rights to a mine for P20,000,000, of which P2,000,000
was allocable to the land. Estimated reserves were 1,500,000 tons. The entity expected to extract
and sell 20,000 tons per month. The entity purchased mining equipment on July 1, 2021 for
P8,000,000. The mining equipment had a useful life 8 years. However, after all the resource is
removed, the equipment will be of no use and will be sold for P500,000.
1. What amount should be reported as depletion for 2021?
a. 2,880,000
b. 1,440,000
c. 2,250,000
d. 1,125,000
2. What amount should be reported as depreciation for 2021?
a. 1,500,000
b. 1,200,000
c. 600,000
d. 468,750
9. An entity paid P20,000,000 for the right to explore and extract rare metals in Mindoro. To obtain
the right, the entity agreed to restore the land to a suitable condition for other uses after exploration
and extraction activities. The entity incurred exploration and development costs of P6,000,000 on
the project. The entity had a credit-adjusted risk free interest rate of 10%. The present value of 1 at
10% for three periods is 0.75. The probable cash flows for restoring the land three years after
extraction activities begin are 60% probability P2,000,000 and 40% probability P5,000,000. What
is the estimated liability for restoration cost at the beginning of the extraction activities?
a. 7,000,000
b. 2,400,000
c. 4,200,000
d. 3,500,000
END 6907