Financial Accounting Reviewer - Chapter 59

CHAPTER 59
DEPLETION
Comprehensive problems
Problem 59-1 (IAA)

On January 1, 2018, Mankayan Company purchased land with valuable natural ore deposits for
P10,000,000. 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 2018, 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 2018,500,000 tons were mined and sold.
A new survey at the end of 2019 estimated 4,200,000 tons of ore available for mining. In
2019,800,000 tons were mined and sold.
1. What amount should be recognized as depletion for 2018?

a. 1,250,000
b. 1,200,000
c. 1,450,000
d. 1,000,000

a. 1,344,000
b. 1,920,000
c. 1,200,000
d. 1,600,000
Solution 59-1
Question 1 Answer b
Acquisition cost 10,000,000

Development cost 1,600,000
Total 11,600,000
Residual value of land (2,000,000)
Depletable amount 9,600,000
Rate per ton (9,600,000/4,000,000) 2.40

Depletion for 2018 (500,000 x 2.40) 1,200,000
Question 2 Answer a
Production in 2019 800,000
Estimated output - December 31, 2019 4,200,000
Total estimate – January 1, 2019 5,000,000

Depletion for 2018 (1,200,000)
Remaining depletable amount 8,400,000
New rate in 2019 (8,400,000 / 5,000,000) 1.68
Depletion for 2019 (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.
Problem 59-2 (IAA)

In 2015, 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 2016, the entity constructed a road to the silver mine costing P5,000,000. Improvements and
other development costs made in 2016 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 2017, a building was constructed near the mine site to house the mine workers and their
families.
The total cost of the building 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 2018, the first year of operations, only 500,000 tons of silver ore were removed from the
mine.
However, in 2019, 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 2019 to facilitate the removal
of the additional silver.
Early in 2019, an additional building was constructed at a cost of £375,000 to house the
additional workers needed to excavate the added silver. This building is not expected to have any
residual value.
1. What is the depletion for 2018?

a. 718,750
b. 650,000
c. 725,000
d. 643,750
2. What is the depletion for 2019?

a. 1,300,000
b. 1,525,000
c. 900,000
d. 700,000
3. What is the depreciation of building for 2018?

a. 250,000
b. 225,000
c. 318,750
d. 343,750
4. What is the depreciation of building for 2019?

a. 300,000
b. 450,000
c. 500,000
d. 290,000
Solution 59-2
Question 1 Answer b
Purchase price 50,000
Road construction 5,000,000
Improvements and other development costs 750,000
Total cost 5,800,000
Residual value ( 600,000)
Depletion rate per unit (5,200,000/4,000,000) 1.30

Depletion for 2018 (500,000 x 1.30) 650,000
Question 2 Answers c
Depletion in 2018 (650,000)
Development costs in 2019 1,300,000
Total depletable amount - January 1, 2019 5,850,000
Original estimate 4,000,000

Additional estimate 3,000,000
Total estimate 7,000,000
Extracted in 2018 (500,000)
Remaining estimate - January 1, 2019 6,500,000
New depletion rate per unit (5,850,000/6,500,000) .90

Depletion for 2019 (1,000,000 x .90) 900,000
Question 3 Answer b
Cost of building 2,000,000
Residual value (200,000)
Depreciable amount 1,800,000
Depreciation rate per unit (1,800,000/4,000,000) .45
Depreciation for 2018 (500,000 x .45) 225,000

Question 4 Answer a
Depreciable amount 1,800,000
Depreciation for 2018 (225,000)
Remaining depreciable amount 1,575,000
Additional building in 2019 375,000
Total depreciable amount - January 1, 2019 1,950,000
New depreciation rate per unit (1,950,000/6,500,000) .30
Depreciation for 2019 (1,000,000 x .30) 300,000
Problem 59-3 (IAA)

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. 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, 2018 and resources removed totaled 600,000 tons. During 2019,
a discovery was made indicating that available resource after 2019 will total 1,875,000 tons.
At the beginning of 2019, additional bunk houses were constructed in the amount of P770,000.
In 2019, only 400,000 tons were mined because of a strike.
1. What amount should be recorded as depletion for 2018?

a. 1,560,000
b. 1,755,000
c. 1,620,000
d. 1,425,000
2. What amount should be recorded as depletion for 2019?

a. 1,560,000
b. 1,040,000
c. 640,000
d. 776,000
3. What amount should be recorded as depreciation for 2018?
a. 2,400,000
b. 1,200,000
c. 1,000,000
d. 500,000
4. What amount should be recorded as depreciation for 2019?

a. 1,120.000
b. 2,400,000
c. 1,600,000
d. 1,360,000
Solution 59-3
Question 1 Answer a
Cost of resource property 5,400,000
Restoration cost 450,000
Residual value (650,000)
Depletion rate (5,200,000/2,000,000) 2.60

Depletion for 2018 (600,000 x 2.60) 1,560,000
Question 2 Answer c
Depletion in 2018 (1,560,000)
Production in 2019 400,000

Estimated output after 2019 1,875,000
Total estimated output - January 1, 2019 2,275,000
New depletion rate in 2019 (3,640,000 / 2,275,000) 1.60

Depletion for 2019 (400,000 x 1.60) 640,000
Question 3 Answer a
Depreciation rate (8,000,000/2,000,000) 4.00
Depreciation for 2018 (600,000 x 4) 2,400,000
Question 4 Answer a
Mine improvements (8,000,000 + 770,000) 8,770,000
Depreciation for 2018 (2,400,000)
Carrying amount - January 1, 2019 6,370,000
New depreciation rate in 2019 (6,370,000/2,275,000) 2.80

Depreciation for 2019 (400,000 x 2.80) 1,120,000
Problem 59-4(IAA)
In 2017, Lepanto Mining Company purchased property with natural resources for P28,000,000.
The property had a residual value 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 2017, the entity spent P1,000,000 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 2018, an amount of P1,000,000 was spent for additional development on the mine.
The tonnage mined and estimated remaining tons are:

Tons extracted Tons remaining
2017 0 10,000,000
2018 3,000,000 7,000,000
2019 3,500,000 2,500,000

a. 6,900,000
b. 9,600,000
c. 8,100,000
d. 8,400,000

a. 10,150,000
b. 11,025,000
c. 15,750,000
d. 9,450,000
Solution 59-4
Question 1 Answer c
Purchase price 28,000,000

Estimated restoration cost 2,000,000
Development cost – 2017 1,000,000
Development cost – 2018 1,000,000
Residual value ( 5,000,000)
Tons extracted in 2018 3,000,000

Remaining tons - December 31, 2018 7,000,000
Rate in 2018 (27,000,000/10,000,000) 2.70

Depletion for 2018 (3,000,000 x 2.70) 8,100,000
Question 2 Answer b
Tons extracted in 2019 3,500,000

Tons remaining on December 31, 2019 2,500,000
Original depletable amount 27,000,000

Depletion in 2018 (8,100,000)
New rate in 2019 (18,900,000/6,000,000) 3.15

Depletion for 2019 (3,500,000 x 3.15) 11,025,000
Problem 59-5 (PHILCPA Adapted)
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. 490,000
b. 560,000
c. 210,000
d. 336,000
Solution 59-5 Answer a

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
(560,000 x 2) 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

Financial Accounting Reviewer - Chapter 59

Uploaded by

Copyright:

Available Formats

Financial Accounting Reviewer - Chapter 59

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Accounting Reviewer - Chapter 59

Uploaded by

Copyright:

Available Formats

CHAPTER 59

Problem 59-1 (IAA)

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

2. What amount should be recognized as depletion for 2019?

Acquisition cost 10,000,000

Rate per ton (9,600,000/4,000,000) 2.40

Depletable amount 9,600,000

New rate in 2019 (8,400,000 / 5,000,000) 1.68

Depletion for 2019 (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.

Problem 59-2 (IAA)

However, in 2019, workers mined 1,000,000 tons of silver.

1. What is the depletion for 2018?

2. What is the depletion for 2019?

3. What is the depreciation of building for 2018?

4. What is the depreciation of building for 2019?

Depletion rate per unit (5,200,000/4,000,000) 1.30

Original estimate 4,000,000

New depletion rate per unit (5,850,000/6,500,000) .90

Depreciation rate per unit (1,800,000/4,000,000) .45

Depreciation for 2018 (500,000 x .45) 225,000

New depreciation rate per unit (1,950,000/6,500,000) .30

Depreciation for 2019 (1,000,000 x .30) 300,000

Problem 59-3 (IAA)

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

2. What amount should be recorded as depletion for 2019?

4. What amount should be recorded as depreciation for 2019?

Depletion rate (5,200,000/2,000,000) 2.60

Production in 2019 400,000

New depletion rate in 2019 (3,640,000 / 2,275,000) 1.60

New depreciation rate in 2019 (6,370,000/2,275,000) 2.80

The tonnage mined and estimated remaining tons are:

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

2. What amount should be recognized as depletion for 2019?

Purchase price 28,000,000

Tons extracted in 2018 3,000,000

Rate in 2018 (27,000,000/10,000,000) 2.70

Tons extracted in 2019 3,500,000

Original depletable amount 27,000,000

New rate in 2019 (18,900,000/6,000,000) 3.15

First year 100,000 tons

What is the depreciation for the fourth year?

Solution 59-5 Answer a

Carrying amount - beginning of third year 1,680,000

Depreciation for third year (1,680,000 / 8 years) 210,000

You might also like