Wasting Assets - Problems

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WASTING ASSETS - PROBLEMS

1. Zambales Company acquired property in 2020 which contains mineral deposit. The acquisition costs of the
property was P 20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can be sold for P5,000,000 following mineral extraction.
For P2,000,000 , Zambales is legally required to restore the land to a condition appropriate for resale.
After acquisition, the following costs were incurred:
Exploration cost P 13,000,000
Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000
The company extracted 600,000 tons of the mineral in 2020 and sold 450,000 tons. In the 2020 income
statement, what amount of depletion is included in cost of sales?
A. P4,800,000 C. P3,600,000
B. P5,400,000 D. P4,050,000
Answer: C

2. Natural, Incorporated embarked on a new venture in Northern Luzon in 2020. It expects to glean
2,000,000 ounces of a precious ore from its holding there, over several years. Relevant data follow:
Cost of the Mineral Rights P 500,000
Exploration Cost, 2020 (1/3 successful) 1,500,000
Extraction Cost, 2020 2,000,000
Ore extracted, 2020 500,000 oz
Ore sold, 2020 300,000 oz
What is the depletion for 2020, using the successful efforts method of accounting for exploration costs?
A. P350,000 C. P 250,000
B. P 300,000 D. P 150,000
Answer: C

3. On January 1, 2020, Major Company purchased a uranium mine for P 800,000. On that date, Major
estimated that the mine contained 1,000 tons of ore. At the end of the productive years of the mine, Major
Company will be required to spend P4,200,000 to clean up the mine site. The appropriate discount rate is
8%, and it is estimate that it will take approximately 14 years to mine all of the ore. Major uses the
productive-output method of depreciation. During 2020, Major extracted 100 tons of ore from the mine.
Compute the amount of depletion for 2020.
A. P114,408 C. P223,000
B. P 80,000 D. P500,000
Answer: C

4. Burns Company has purchased land that will serve as a temporary repository for nuclear waste. The site
will function for 30 years, at which time Burns will be required to completely decontaminate the land. The
purchase price for the land is P500,000. Burns knows that the land will have to be decontaminated but
isn’t sure which of several possible approaches will be sufficient to reach the level of decontamination
necessary by law. The costs of each approach, and the estimated probability that the approach will be the
one used, follow:
Approach 1 – 10% probability of total decontamination cost of P5,000 at the end of 30 years.
Approach 2 -20% probability of total decontamination cost of P100,000 at the end of 30 years.
Approach 3 – 70% probability of total decontamination cost of P1,500,000 at the end of 30 years.

Assuming that the appropriate interest rate is 8%, the cost of the nuclear waste repository site is
A. P606,384 C. P 659,500
B. P156,072 D. P 500,000
Answer: A

5. Botolan Company quaries limestone, cruches it and sells it to be used in road building. Botolan paid
P20,000,000 for a certain quarry on January 1, 2019. The property can be sold for P 4,000,000 after
production ceases. The original total estimated reserves totaled 5,000,000 tons. Botolan quarried
500,000 tons in 2019 and 1,500,000 tons in 2020. An engineering study performed in 2020 indicated that
as of December 31, 2020, 4,500,000 tons were available. Botolan Company should record depletion at
A. P3,600,000 C. P4,800,000
B. P 6,000,000 D P 4,500,000
Answer: A

6. In 2018, Lepanto Mining Company purchased property with natural resources for P28,000,000. The
property had a residual value of P5,000,000. However, the company is required to restore the property to
its original condition for P2,000,000.
In 2018, Lepanto spent P 1,000,000 in development costs an dP3,000,000 in buildings on the property.
Lepanto does not anticipate that the buildings will have utility after the natural resources are removed. In
2019, an amount of P1,000,000 was spent for additional development on the mine. The tonnage mined
and estimated remaining tons for years 2018 to 2020 are as follows:
Tons extracted Tons remaining
2018 0 10,000,000
2019 3,000,000 7,000,000
2020 3,500,000 2,000,000
The company should recognized depletion for 2020 at
A. P10,150,000 C. P14,245,000
B. P12,040,000 D. P 9,450,000
Answer: B

7. Masinloc Company purchased a tract of resource land in 2019 for P39,600,000. The content of the tract
was estimated at 1,200,000 units. When the resource has been exhausted, it is estimated that the land will
be worth P1,200,000. Fixed installations were set up at a cost of P9,600,000. Mining equipment was
purchased on January 2, 2020 for P 12, 400,000. The life of the fixed installations if 8 years and the
equipment, 4 years. In 2020, 120,000 units have been extracted. This was one half of the annual
extraction which can be expected following the first year of operations.

Masinloc company should record total depreciation for 2020 at


A. P4,060,000 C. P2,200,000
B. P3,100,000 D. P 960,000
Answer: A

8. Leyte Company constructed a building costing P15,000,000 on a mine property. The building has an
estimated life of 6 years with no salvage value. After all the resource is removed expectedly over 5 years,
the building will be of no use. The estimated recoverable output from the mine is 1,000,000 tons. During
the first year, Leyte produced 200,000 tons but there was shut down and no output in the second year. In
the third year, 300,000 tons were extracted when the operation resumes. Leyte Company should record
depreciation of the building in the third year at
A. P3,000,000 C. P3,600,000
B. P 2,500,000 D. P 4,500,000
Answer: C

9. ABC Company provides the following balances at the end of 2020:


Wasting asset, at cost P80,000,000
Accumulated depletion 20,000,000
Retained earnings 10,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units extracted at P50 per unit 5,000,000
Inventory of resource deposit (20,000 units) 2,000,000
Compute for the maximum amount of dividend that ABC can declare on December 31, 2020.
A. P 20,000,000 C. P 15,000,000
B. P 14,000,000 D. P 13,000,000
Answer: B

DO-IT-YOURSELF DRILL

1. During 2020, Bolton Corporation acquired a mineral mine for P 1,500,000 of which P200,000 was ascribed
to land value after the mineral has been removed. Geological surveys have indicated that 10 million units
of the mineral could be extracted. During 2020, 2,000,000 units were extracted and 1,600,000 units were
sold. What is the amount of depiction expensed for 2020?
A. P300,000 C. P 240,000
B. P208,000 D. P260,000
Answer: B

2. On July 1, 2020, Iba Mining Company, a calendar-year corporation, purchased the rights to a copper mine.
Of the total purchase price, P 2,800,000 was appropriately allocable to copper. Estimated reserves were
800,000 tons of copper. Iba expects to extract and sell 10,000 tons of copper per month. Production
began immediately The selling price is P2,500 per ton. If sales and production conform to expectations,
what is Iba’s depletion expense on this mine for financial accounting purposes for the calendar year 2020?
A. P 35,000 C. P 410,000
B. P210,000 D. P 0
Answer: B

3. An oil company using the successful-efforts method drilled two wells. The first, a dry hole, cost P50,000.
The second cost P100,000 and had estimated recoverable reserves of 25,000 barrels, of which 10,000
were sold this year. What will be the total expense for the year related to the exploration and production
from these two wells?
A. P 40,000 C. P 90,000
B. P 60,000 D. P 150,000
Answer: C

4. Yakal Exploration Co. purchased in 2018 a property that contained mineral deposit for P 4,500,000.
Estimated recovery was P 1,000,000 metric tons of deposits. Development costs P150,000 were also
incurred in the same year. The mining property was expected to be worth P600,000 after the mineral
deposits had all be removed. During 2019, the company extracted and sold 100,000 metric tons of
minerals. Further development costs of P75,000 were incurred in 2020, and the estimate of total
recoverable deposits (including the amount extracted in 2019) was revised to 925,000 metric tons. During
2020, the company recovered 150,000 metric tons.
The depletion for the year 2020 is
A. P 603,658 C. P 676,500
B. P 618,750 D. P 750,000
Answer: C

Use the following information for the next two questions.

The APPLE MINING Co. on May 31, 2020, acquired the rights to a coal mine containing an estimated
reserves of 1,000,00 tons of coal. The company estimated that 12, 500 tons of coal would be extracted
and sold each month. Cost allocable to coal was P3,500,000.

Also on May 31, 2020, the company purchased an equipment to be used in the production, costing
P95,000 which has an estimated useful life of 10 years. The equipment was expected to become obsolete
after all the coal deposits had been extracted from the mine and only P 5,000 selling price of the equipment
could be expected. Production was in full blast since June 1, 2020.

5. What would be the depletion expense for the year ended December 31, 2020?
A. P 525,000 C. P 153,125
B. P 262,500 D. P 306,250
Answer: D

6. What would be the depreciation expense on the new equipment for the year ended December 31, 2020?
A. P9,000 C. P 7,875
B. P 4,500 D. P 8,313
Answer: C

7. On July 1, 2020 Cabangan Company purchased rights to a mine. The total purchase pice swas P
50,000,000 of which P 5,000,000 was allocated to the land. Estimated reserves were 6,000,000.
Cabangan expects to extract and sell 100,000 tons per month. Cabangan Company purchased new
equipment on July 1, 2020 for P 21,000,000 with estimated life of 8 years. However, after all the
resources is removed, the equipment will be of no use and will be sold for P3,000,000. What is the
depreciation of the equipment for 2020?
A. P 1,800,000 C. P 2,100,000
B. P 1,125,000 D. P 3,600,000
Answer: A

8. Toledo Mining Company constructed a building costing P 2,800,000 on the mine property. Its estimated
residual value will not benefit the company and will be ignored for purposes of computing depreciation.
The building has an estimated life of 10 years. The total estimated recoverable units from the mine is
500,000 tons. The company’s product 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. P 490,00 C. P 210,000
B. P 560,000 D. P 336,000
Answer: A

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