NEW DEPLETION RATE:

1) Celestine Company quarries limestone, crushes it and sells it to be used in

the 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, 2017 4,000,000
Tons quarried in 2017 1,500,000

An engineering study indicated that on January 1, 2017, 7,500,000 tons of limestone were available.

What is the depletion in 2017? Quarry- to dig or take (stone or other

a. 1,050,000 materials) from a quarry (open
excavation usually for obtaining
b. 2,800,000 building stones, slate, or limestone)
c. 1,200,000
d. 840,000

SOLUTION:

Change in Estimate:

How to AFFECT the CHANGE in estimate:

STEP 1: Determine the CA of the wasting assets as at the beginning of the period of change
(LATEST CARRYING AMOUNT BEFORE THE CHANGE). This carrying amount shall be the
basis of the new estimate a.k.a. the “as if” new cost.

STEP 2: Apply the changes by depleting the carrying amount on STEP 1 using the revised
estimated number of reserves and/or residual value.

STEP 1: Compute CA at the Beginning of the Period of Change.

Notice: Change happened in 2017

P ORIGINAL Depletion Rate:

Cost of WA: 10,000,000 = P 0.70
Accumulated Depletion: (2,800,000)
(4M x P0.70)
CA, Jan. 1, 2017: P 7,200,000

STEP 1: Compute for the Total Cost of the Wasting

NEW Depletion Rate: Asset/ Natural Resource:

= P 0.56  Acquisition Cost of Natural Resource

 Exploration and Evaluation Cost
 Intangible Development Cost
 Estimated Restoration Cost

STEP 2: Deduct Residual value (if any).

STEP 3: Divide # of Units Estimated to be Extracted @

Beginning of the year.
Depletion for 2017: P 840,000 STEP 4: Multiply Depletion Rate to Actual # of Units
(1.5M actual units x P 0.56) Extracted.

RECALL:
How to compute for Depletion?
ACTUAL Units Extracted during the Year: XX
MULTIPLY:

Depletion Rate:
PX

Depletion: P XX
Alternatively:
ORIGINAL Depletion Rate:
Acquisition cost: P 10,000,000
Residual value: (3,000,000) = P 0.70
Depletable amount P 7,000,000
Accumulated depletion-Jan. 1, 2017
(4,000.000 x.70) (2,800,000) NEW Depletion Rate:
Remaining depletion amount- Jan. 1, 2017 P 4,200,000 = P 0.56

Depletion for 2017:

P 840,000
(1.5M actual units x 0.56)

NOTE: Estimated # of units to be extracted at the BEGINNING of the year

- Given.

2) Nicholas Company paid P1,000,000 to purchase land containing total estimated 160,000 tons of extractable
deposits.

The estimated value of the property after the mineral has been removed is P200,000.
Extraction activities began in 2017, and by the end of the year, 20,000 tons had been
recovered and sold.

In 2018, geological studies indicated that the total amount of mineral deposits had been underestimated by
25,000 tons. During 2018, 30,000 tons were extracted and 28,000 tons were sold.

What is the depletion rate per ton in 2018?

a. 4.24
b. 4.32
c. 4.85
d. 5.19

SOLUTION: ORIGINAL Depletion Rate:

=P5

Change in estimated deposits

happened in Jan. 1, 2018:

Cost of WA: P 1,000,000

Accumulated Depletion: (100,000) NEW Depletion Rate:
(20K actual units x P 5)
CA, Jan. 1, 2018: P 900,000 = P 4.24

Original estimate 160,000

Extracted in 2017 (20,000
)
Remaining estimate 140,000
Underestimate 25,000
Adj t d ti t J 1 2018 165 000

Alternatively:
Cost P 1,000,000
Residual value (200,000)
Depletable amount P 800,000
Depletion in 2017
(20,000 x 5) (100,000)
Remaining depletable amount- January 1, 2018 P 700,000
Depletion rate in 2017
(800,000/ 160,000) 5

NOTE: You have to compute for the adjusted estimate of the mineral deposits.
CHAIN PROBLEM:
On July 1, 2017, Lincoln Company, a calendar year corporation, purchased the right 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, 2017 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.

3) What amount should be recorded as depletion for 2017?

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

4) What amount should be recorded as depreciation of the mining equipment for 2017?
a. 450,000
b. 900,000
c. 600,000
d. 300,000

SOLUTION:

DEPLETION DEPRECIATION
- Applies to the Wasting Asset/ Natural Resource. - Applies to the PPE used in excavating
- “Tangible Development Costs”

How to compute for Depletion?

Recall:
STEP 1: Compute for the Total Cost of the Wasting How to compute for Depreciation?
Asset/ Natural Resource:
Recall:
 Acquisition Cost of Natural Resource
 Exploration and Evaluation Cost (PPE) DEPRECIATION OF TANGIBLE DEVELOPMENT COSTS:
 Intangible Development Cost Useful Life to be Depreciation
 Estimated Restoration Cost Used Method

STEP 2: Deduct Residual value (if any).

STEP 3: Divide # of Units Estimated to be Extracted @

Beginning of the year to get Depletion Rate. Own UL
SL Method
(UL of PPE)
STEP 4: Multiply Depletion Rate to Actual # of Units
Extracted.
Check:
Cost of WA: P 16,400,000 PPE: New Equipment; after all the resource
is removed, the equipment would be of no
Residual value: (2,000,000)
use.
Depletable amount: P 14,400,000
- NO OTHER USE
Actual Production from July 1 to December 31,
- Shorter.
2017
(25,000 x 6) 150,000 Own UL SL
SHORT 8 yrs.
Depletion rate - Given Method
ER UL of WA
6 yrs.
Output
Depletion Rate: - Compute Method

=P8
UL of WA is computed as:

= 72 months 12 months
= 6 years

NOTE: Since the equipment has NO OTHER use,

P8
choose the SHORTER base. The life of the mine
Depletion for 2017 P 1,200,000 (WA)is SHORTER than the life of the equipment
(PPE), thus, 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 projects, the equipment is
depreciated over the useful life using the straight-line
method.
Depreciation Rate:
Recall:

Equipment P 7,500,000
Residual value (300,000)
Depreciable amount P 7,200,000

Actual Production from July 1 to December 31,

2017
(25,000 x 6) 150,000
Depreciation rate
Depreciation Rate:

= P4

P4
Depreciation for 2017 P 600,000

5) Hasley Company is involved in the exploration for mineral rights. During the current year, the entity incurred
the following expenditures:
Exploratory drilling for minerals on site 2,000,000
Roads and infrastructure to access exploration site 3,500,000
Expenditures relating to the subsequent 3,400,000
development of the resources

At what amount should exploration assets be initially recognized?

a. 2,000,000
b. 5,400,000
c. 5,500,000
d. 8,900,000

SHUTDOWN:

6) In 20x1, Apricot Co. purchased real estate containing copper for a total cost of P10,000,000.
Immovable tangible equipment costs for drilling rig foundation totaled
P5,000,000. Estimated recoverable reserves from the mine are 1,000,000 units. It
is estimated that 100,000 units will be extracted each year, therefore the life of the
mine in years is 10 years. The drilling rig has an estimated useful life of 15 years.

Actual units extracted from 20x1 through 20x3 totaled 340,000 units. No units were extracted during 20x4
due to an employee strike. Extraction resumed in 20x5 and total units extracted during that year was 80,000
units.

Compute for the following:

a) Depreciation charge on the immovable tangible equipment (PPE) in 20x4.
b) Depreciation charge on the immovable tangible equipment (PPE) in 20x5.

SOLUTION:

Recall:
In the problem: Production
20x1 - 20x3:
ACCOUNTING FOR SHUTDOWN SHUTDOW
During the period of Shutdown or Non-extraction: 20x4:
N
1. No depletion is charged.
2. Depreciation continues since the asset is still 20x5:
available for use. This is the accounting problem
in the periods of shutdown.

SHUTDOWN Step-by-step Process:

PERIOD of SHUTDOWN
STEP 1: Compute CA before shutdown
- Depreciate SL method using remaining
has occurred.
UL of PPE
STEP 2: Depreciate using SL during
RESUMPTION of EXTRACTION Shutdown Period.
=
How to compute
Rem. UL of PPE for
SHORTER STEP 3: Once extraction resumes, return
Rem. UL of WA
to original method of depreciation before
shutdown occurred.
Depreciation?
Recall:
(PPE) DEPRECIATION OF TANGIBLE DEVELOPMENT COSTS:
Useful Life to be Depreciation
Used Method

Own UL
SL Method
(UL of PPE)

Immovable Tangible Development Costs

The life of the mine (WA) is SHORTER

than the life of the immovable tangible
equipment (PPE). Thus, the cost of the
immovable tangible equipment should be
depreciated using the OUTPUT/UNITS-
OF PRODUCTION Method

STEP 1: Compute CA before shutdown has occurred.

The carrying amount of the immovable tangible equipment as of January 1, 20x4 is determined as follows:

Cost of Drilling Rig Foundation P 5,000,000

Depreciation on the immovable
tangible equipment is computed as
Accumulated Depreciation
(340,000 units x 5) follows: (1,700,000)
CA- Jan. 1, 20x4 P 3,300,000
Depreciation Rate:

= P5

YEAR OF SHUTDOWN: 20x4

STEP 2: Depreciate using SL during Shutdown Period.

Depreciation for 20x4 using STRAIGHT-LINE is computed as follows:

CA- Jan. 1, 20x4 P 3,300,000
Divide: Remaining life in years (15-3) 12
Depreciation for 20x4 P 275,000

NOTE: Although depreciation is

recognized in 20x4 for the equipment,
no depletion charge will be recognized
on the wasting asset.

RESUMPTION of EXTRACTION: 20x5

STEP 3: Once extraction resumes, return to original method of depreciation before shutdown
occurred.

The carrying amount of the immovable tangible equipment as of January 1, 20x5 is determined as follows:
Cost of Drilling Rig Foundation PThe AD on January 1, 20x5 is
5,000,000
Accumulated Depreciation computed as follows:
(1,975,000)
CA- Jan. 1, 20x5 P AD,
3,025,000
Jan. 1, 20x4 P
(340,000 units x 5) 1,700,000
Depreciation for
20x4 275,000
Depreciation for 20x5 using UNITS-OF-PRODUCTION Method is
computed as follows:

Depreciation Rate:

= P 4.58

Remaining reserve deposits as on Jan. 1, 20x5 is

computed as follows:
Total Estimated Deposits: 1,000,000
Deposits extracted from 20x1 to 20x3: (340,000)
Remaining deposits- Jan. 1, 20x5: 660,000
Depreciation in 20x5:
Actual Extraction in 20x5 80,000
Depreciation rate

Depletion Rate:

= P 4.58

P 4.58
Depreciation for 20x5: P 366,400

Depreciation for 20x5

= (80,000 x 4.58)
= 366,400