WASTING ASSETS

* natural resources, such as coal, oil, timber, and precious metals like gold, silver
* of economic value produced by NATURE
* these are PHYSICALLY CONSUMED and once consumed are IRREPRACEABLE, except by the process of natu

COST OF WASTING ASSET

* divided into four categories
1 ACQUISITION COST
= price paid to obtain the property containing the natural resource

2 EXPLORATION COST
= expenditure incurred BEFORE the technical feasibility and commercial viability of extracting min
= cost incurred TO LOCATE the natural resource, which may include: acquisition of right to explore
geological study, exploratory drilling, trenching and sampling
= exploration may be successful or unsuccesful

**2 METHODS IN ACCOUNTING FOR EXPLORATION COST

A. Successful effort method
= ONLY exploration cost directly related to the discovery of commercial producible natu
CAPITALIZABLE. Stated differently, only successful discovery expenditures is ADDED
wasting asset
= all expenditures in the discovery of dry holes or unsuccessful efforts are EXPENSED ou
= most large and successful oil entities follow this method

B. Full cost method

= ALL exploration costs, whether successful or unsuccessful are capitalized. Stated diffe
exploration costs regardless whether successful or unsuccessful, are ADDED to the
asset

3 DEVELOPMENT COST
= cost incurred to exploit or extract the natural resource that has been located through successful

* 2 KINDS of DEVELOPMENT COST

A. Tangible Development Cost
= may be in the form of tangible equipment, such as transportation equipment, heavy m
bunker and mine shaft
= NOT included in the cost of the wasting asset, but added to PROPERTY, PLANT and
DEPRECIATED with normal depreciation policies

B. Intangible Development Cost

= included or added to the cost of the wasting asset, which includes: drilling, sinking m
of wells
 4 RESTORATION COST
= estimated cost to be incurred in order to bring the wasting asset to its original condition
= capitalized or added to the cost of the wasting asset ONLY when the entity incurs the obligation
acquired. Stated differently, must be added only if there is an existing present obligation requ
contract
= the restoration cost must be DISCOUNTED

DEPLETION
* the removal, extractiion or exhaustion of a natural resource
* the systematic allocation of the DEPLETABLE amount of a wasting asset over the period the natural resourc
produced
* the cost of the material used in production
* the depletion method is normally the OUTPUT or PRODUCTION METHOD

Depletion expense = Depletion Rate x Actual Units Produced / extracted

**Depletion Rate = Depletable Cost

(per unit) Est. total # of units to be produced/extrac

> Financial statement presentation:

** an EXPENSE account which is part of the Cost of goods Manufactured

ENTRY: Depletion expense XX

Accumulated depletion XX

> Changes in estimate are to handled currently and prospectively, similar to PPE

DEPRECIATION OF MINING PROPERTY ( TANGIBLE DEVELOPMENT COST)

*GENERALLY, the depreciation of equipment or the tangible development cost (TDC) is based on
the useful life of the TDC or the useful life of the wasting asset, whichever is SHORTER

* IF, the useful life of the TDC is shorter, use straight-line method of depreciation
* IF, the useful life of the wasting asset is shorter, use output method of depreciation

* IF, the TDC is movable and can be used in the future extractive project, the TDC IS depreciated
over its useful life using the straight-line method
 > In the event of SHUTDOWN, when the output method is used in depreciating TDC, such method cannot be
In this case, depreciation is based on the remaining life of the equipment or TDC following the straight l
method.

> When operations resume, the output method is again used in computing for depreciation with a new dep

WASTING ASSET DOCTRINE

* an entity engaged in the extraction of a natural resource can LEGALLY return capital to shareholders du
of the corporation, in contrast to the TRUST FUND doctrine
* accordingly, a wasting asset corporation can pay dividend in excess of its retained earnings up to the exte
accumulated depletion balance
* a "CAPITAL LIQUIDATED" account is created in excess and deducted from the total shareholders' eq
 BLE, except by the process of nature.

mmercial viability of extracting mineral resource

lude: acquisition of right to explore,

very of commercial producible natural resource is

ul discovery expenditures is ADDED to the COST of the

successful efforts are EXPENSED outright.

cessful are capitalized. Stated differently, all

or unsuccessful, are ADDED to the COST of the wasting

as been located through successful exploration

transportation equipment, heavy machinery, tunnels

t added to PROPERTY, PLANT and EQUIPMENT, thus,

, which includes: drilling, sinking mine shaft and construction

 set to its original condition
hen the entity incurs the obligation when the asseet is
an existing present obligation required by law or

over the period the natural resource is extracted or

Actual Units Produced / extracted

Depletable Cost
Est. total # of units to be produced/extracted

ment cost (TDC) is based on

hever is SHORTER

depreciation

the TDC IS depreciated

iating TDC, such method cannot be used.
ent or TDC following the straight line

ng for depreciation with a new depreciatin rate

Y return capital to shareholders during the lifetime

ts retained earnings up to the extent of the

ted from the total shareholders' equity

PROBLEM 1
Resource Company was engaged in the rock and gravel business. The following transactions relate to the a
development of an extensive gravel pit:
2019 Cost of acquisition and development 960,000
Estimated output 2,400,000 tons
Production 1,000,000 tons

2020 Additional development cost 490,000

Production 600,000 tons

2021 Additional development cost 500,000

New estimate of remaining output 2,500,000 tons
Production 700,000 tons

JOURNAL ENTRIES: For 2019, how much is

2019 Wasting asset 960,000 1 Depletion for the y

Cash 960,000
2 Carrying value of th
Depletion expense 400,000
Accumulated depletion 400,000

COMPUTATION:
Cost 960,000
Divided by: Estimated output 2,400,000
Depletion rate per ton 0.4
Multiply by: Production 1,000,000
Depletion expense 400,000
For 2020, how much is
2020 Wasting asset 490,000
Cash 490,000 1 Depletion for the y

Depletion expense 450,000 2 Carrying value of th

Accumulated depletion 450,000

COMPUTATION:
Remaining book value 560,000
Add: Additional cost 490,000
Total 1,050,000
Divided by: Remaining Estimated output
(2,400,000 - 1,000,000) 1,400,000
Depletion rate per ton 0.75
 Multiply by: Production 600,000
Depletion expense 450,000
For 2020, how much is
2021 Wasting asset 500,000
Cash 500,000 1 Depletion for the y

Depletion expense 308,000 2 Carrying value of th

Accumulated depletion 308,000

COMPUTATION:
Remaining book value 600,000
Add: Additional cost 500,000
Total 1,100,000
Divided by: Remaining Estimated output
** new estimate 2,500,000
Depletion rate per ton 0.44
Multiply by: Production 700,000
Depletion expense 308,000
actions relate to the acquisition and

For 2019, how much is:

Depletion for the year 400,000

Carrying value of the wasting asset

Cost 960,000
Less: Accumulated depletion 400,000
Carrying value or book value 560,000

For 2020, how much is:

Depletion for the year 450,000

Carrying value of the wasting asset

Cost (960,000 + 490,000) 1,450,000
Less: Accumulated depletion
2019 400,000
2020 450,000 850,000
Carrying value or book value 600,000
For 2020, how much is:

Depletion for the year 308,000

Carrying value of the wasting asset

Cost (960,000 + 490,000 + 500,000) 1,950,000
Less: Accumulated depletion
2019 400,000
2020 450,000
2021 308,000 1,158,000
Carrying value or book value 792,000
PROBLEM 2
Reliable Company purchased a tract of resource land in 2019 for P3,960,000. The content of the tract was e
When the resource has been exhausted, it is estimated that the land will be worth P120,000.

The entity incurred P10,800,000 of development costs preparing the property for the extraction of ore. Du
of the building is 8 years and the useful life of the equipment is 4 years

In 2019, 12,000 units have been extracted. This was one half of the annual extraction which can be expecte
operations. In 2020, 25,000 units were extracted.

GIVEN:
Cost of WASTING ASSET 3,960,000 Cost of the Tangible
Estimated output 120,000 units
Residual value 120,000
Estimated output per year** 24,000 units Estimated life of bu
(**based on third paragraph) Estimated life of eq
Estimated life in years 5 years

Actual extraction in units 2019 12,000 units

2020 25,000 units

JOURNAL ENTRIES: For 2019, how much is

2019 Wasting asset 3,960,000 1 Depletion for the y

Cash 3,960,000
2 Carrying value of th
Depletion expense 384,000
Accumulated depletion 384,000

COMPUTATION:
Cost 3,960,000
Less: Residual value 120,000
Depletable cost 3,840,000
Divided by: Estimated output 120,000
Depletion rate per ton 32
Multiply by: Production 12,000
Depletion expense 384,000

Building 960,000 3 Depreciation of bui

Cash 960,000
4 Carrying value of th
Depreciation expense 96,000
 Accumulated depreciation 96,000

COMPUTATION:
Cost 960,000
Divided by: Estimated output 120,000
Depreciation rate per ton 8
Multiply by: Production 12,000
Depreciation expense 96,000

** the output method of depreciation is used because the life of the

wasting asset of 5 years is lower than the life of the building of 8 years

Equipment 1,240,000 5 Depreciation of equ

Cash 1,240,000
6 Carrying value of th
Depreciation expense 310,000
Accumulated depreciation 310,000

COMPUTATION:
Cost 1,240,000
Divided by: Estimated useful life 4
Depreciation per year 310,000
Multiply by: 1 year 1
Depreciation expense 310,000

** the straight -line method of depreciation is used because the life of the
wasting asset of 5 years is higher than the life of the equipment of 4 years

2020 For 2020, how much is

Depletion expense 800,000 1 Depletion for the y
Accumulated depletion 800,000
2 Carrying value of th
COMPUTATION:
Cost 3,960,000
Less: Residual value 120,000
Depletable cost 3,840,000
Divided by: Estimated output 120,000
Depletion rate per ton 32
Multiply by: Production 25,000
Depletion expense 800,000
Depreciation expense 200,000 3 Depreciation of bui
Accumulated depreciation 200,000
4 Carrying value of th
COMPUTATION:
Cost 960,000
Divided by: Estimated output 120,000
Depreciation rate per ton 8
Multiply by: Production 25,000
Depreciation expense 200,000

** the output method of depreciation is used because the life of the

wasting asset of 5 years is lower than the life of the building of 8 years

Depreciation expense 310,000 5 Depreciation of equ

Accumulated depreciation 310,000
6 Carrying value of th
COMPUTATION:
Cost 1,240,000
Divided by: Estimated useful life 4
Depreciation per year 310,000
Multiply by: 1 year 1
Depreciation expense 310,000

** the straight -line method of depreciation is used because the life of the
wasting asset of 5 years is higher than the life of the equipment of 4 years
ntent of the tract was estimated at 120,000 units.

e extraction of ore. During the current year,

n which can be expected following the first year of

Cost of the Tangible development cost

Building 960,000
Equipment 1,240,000
Estimated life of building 8 years
Estimated life of equipment 4 years

* IF, the useful life of the TDC is shorter, use straight-line method of depreciation
* IF, the useful life of the wasting asset is shorter, use output method of depreciation

For 2019, how much is:

Depletion for the year 384,000

Carrying value of the wasting asset

Cost 3,960,000
Less: Accumulated depletion 384,000
Carrying value or book value 3,576,000

Depreciation of building for the year 96,000

Carrying value of the building

Cost 960,000
 Less: Accumulated depreciation 96,000
Carrying value or book value 864,000

Depreciation of equipment for the year 310,000

Carrying value of the equipment

Cost 1,240,000
Less: Accumulated depreciation 310,000
Carrying value or book value 930,000

For 2020, how much is:

Depletion for the year 800,000

Carrying value of the wasting asset

Cost 3,960,000
Less: Accumulated depletion
2019 384,000
2020 800,000 1,184,000
Carrying value or book value 2,776,000
Depreciation of building for the year 200,000

Carrying value of the building

Cost 960,000
Less: Accumulated depreciation
2019 96,000
2020 200,000 296,000
Carrying value or book value 664,000

Depreciation of equipment for the year 310,000

Carrying value of the equipment

Cost 1,240,000
Less: Accumulated depreciation
2019 310,000
2020 310,000 620,000
Carrying value or book value 620,000
PROBLEM 3
At the beginning of the current year, Handsome Company purchased a mineral mine for P36,000,000 with r
by geological survery at 2,160,000 tons. The property has an estimated value of P3,600,000 after the ore h

The entity incurred P10,800,000 of development costs preparing the property for the extraction of ore. Du
270,000 tons were removed and 240,000 tons were sold.

GIVEN:
Acquisition cost 36,000,000
Estimated tons of ore for extraction 2,160,000 tons
Residual value 3,600,000
Development cost 10,800,000
Actual tons extracted 270,000 tons
Actual tons sold 240,000 tons

JOURNAL ENTRIES: For 2019, how much is

2019 Wasting asset 46,800,000 1 Depletion for the y

Cash 46,800,000
( Acq cost of 36,000,000 + Dev Cost of 10,800,000) 2 Carrying value of th

Depletion expense 5,400,000

Accumulated depletion 5,400,000

COMPUTATION:
Cost 46,800,000
Less: Residual value 3,600,000
Depletable cost 43,200,000
Divided by: Estimated output 2,160,000
Depletion rate per ton 20
Multiply by: Production 270,000
Depletion expense 5,400,000

Inventory 600,000
Depletion expense 600,000

Depletion rate per ton 20

Multiply by: Unsold ( 270,000 - 240,000) 30,000
Depletion expense 600,000
for P36,000,000 with removable ore estimated
00,000 after the ore has been extracted.

e extraction of ore. During the current year,

For 2019, how much is:

Depletion for the year 4,800,000

Carrying value of the wasting asset

Cost 46,800,000
Less: Accumulated depletion 5,400,000
Carrying value or book value 41,400,000
PROBLEM 4
In 2018, Lepanto Mining Company purchased property with natural resources for P28,000,000. The proper
value of P5,000,000.

However, the entity is required to restore the property to the original condition at a discounted amount of
the entity spent P1,000,000 in development cost and constructed a building on the property costing P3,000

The entity does not anticipate that the building will have utility after the natural resources are removed. In
of P1,000,000 was spent for additional development on the mine.
Tons extracted Tons remaining
2018 - 10,000,000
2019 3,000,000 7,000,000
2020 3,500,000 2,500,000

GIVEN:
Acquisition cost 28,000,000
Estimated tons for extraction 10,000,000 tons
Residual value 5,000,000
Development cost - tangible 3,000,000
Development cost - intangible 2018 1,000,000
2019 1,000,000
Restoration cost 2,000,000

JOURNAL ENTRIES: For 2018, how m

2018 Wasting asset 31,000,000 1

Cash 31,000,000
(Acq cost of 28M + Dev Cost of 1M + Rest Cost of 2M) 2

Depletion expense -
Accumulated depletion -

COMPUTATION:
Cost 31,000,000
Less: Residual value 5,000,000
Depletable cost 26,000,000
Divided by: Estimated output 10,000,000
Depletion rate per ton 2.6
Multiply by: Actual tons extracted -
Depletion expense -
 Building 3,000,000 3
Cash 3,000,000
4
Depreciation expense -
Accumulated depreciation -

COMPUTATION:
Cost 3,000,000
Divided by: Estimated output 10,000,000
Depreciation rate per ton 0.3
Multiply by: Actual tons extracted -
Depreciation expense -

** the output method of depreciation is used because the building will

have no utility after the natural resources are removed

2019 For 2019, how m

Wasting asset 1,000,000 1
Cash 1,000,000
2
Depletion expense 8,100,000
Accumulated depletion 8,100,000

COMPUTATION:
Remaining book value 31,000,000
Add: Additional development cost 1,000,000
Total 32,000,000
Less: Residual value 5,000,000
Depletable cost 27,000,000
Divided by: Estimated output 10,000,000
Depletion rate per ton 2.7
Multiply by: Actual tons extracted 3,000,000
Depletion expense 8,100,000

Depreciation expense 900,000 3

Accumulated depreciation 900,000
4
COMPUTATION:
Cost 3,000,000
 Divided by: Estimated output 10,000,000
Depreciation rate per ton 0.3
Multiply by: Actual tons extracted 3,000,000
Depreciation expense 900,000

** the output method of depreciation is used because the building will

have no utility after the natural resources are removed

2020 For 2020, how m

Depletion expense 9,450,000 1
Accumulated depletion 9,450,000
2
COMPUTATION:
Cost 32,000,000
Less: Residual value 5,000,000
Depletable cost 27,000,000
Divided by: Estimated output 10,000,000
Depletion rate per ton 2.7
Multiply by: Actual tons extracted 3,500,000
Depletion expense 9,450,000

Depreciation expense #DIV/0!

Accumulated depreciation #DIV/0! 3

COMPUTATION: 4
Cost -
Divided by: Estimated output -
Depreciation rate per ton #DIV/0!
Multiply by: Production -
Depreciation expense #DIV/0!

** the output method of depreciation is used because the building will

have no utility after the natural resources are removed
P28,000,000. The property had a residual

a discounted amount of P2,000,000. In 2018,

e property costing P3,000,000.

sources are removed. In 2019, an amount

For 2018, how much is:

Depletion for the year -

Carrying value of the wasting asset

Cost 31,000,000
Less: Accumulated depletion -
Carrying value or book value 31,000,000
 Depreciation of building for the year -

Carrying value of the building

Cost 3,000,000
Less: Accumulated depreciation -
Carrying value or book value 3,000,000

For 2019, how much is:

Depletion for the year 8,100,000

Carrying value of the wasting asset

Cost 32,000,000
Less: Accumulated depletion
2018 -
2019 8,100,000 8,100,000
Carrying value or book value 23,900,000

Depreciation of building for the year 900,000

Carrying value of the building

Cost 3,000,000
Less: Accumulated depreciation
 2018 -
2019 900,000 900,000
Carrying value or book value 2,100,000

For 2020, how much is:

Depletion for the year 9,450,000

Carrying value of the wasting asset

Cost 32,000,000
Less: Accumulated depletion
2018 -
2019 8,100,000
2020 9,450,000 17,550,000
Carrying value or book value 14,450,000

Depreciation of building for the year #DIV/0!

Carrying value of the building

Cost -
Less: Accumulated depreciation
2019 -
2020 #DIV/0! #DIV/0!
Carrying value or book value #DIV/0!