Wasting Assets and Depletion (PFRS 6) Flashcards
Explain Wasting Assets
Natural resources property in the form of land
containing mineral deposits, precious stones and metals or trees to be harvested as logs and lumber with a limited life and will be subject to depletion using the production method.
Natural. Irreplaceable. Not produce by human being.
The total cost of the wasting asset shall be (4 categories). This is also the initial measurement.
✓ Acquisition cost
✓ Exploration cost
✓ Development cost
✓ Restoration cost
Explain
✓ Acquisition
cost
Purchase price of the property. Halaga ng land.
Explain
✓ Exploration cost
Cost incurred to locate the minerals and other resources beneath the surface of the property.
-Trial and Error Costs
-May two method in capitalizing this costs:
1. Successful Effort Method:
a. Successful - Capitalized
b. Unsuc (cost of dry holes) - Expense
-Usually for Large Company
2. Full Cost Method:
a. Lahat capitalized whether successful or unsucessful
-for Small Companies
Explain
✓ Development cost
Cost incurred for the actual production or extraction of the minerals and other resources.
Development cost is naturally incurred multiple number of times during the period of production and will usually cause the recomputation of the rate.
Development cost related to other
tangible assets should not be capitalized as part of the wasting asset rather as other items of PPE and depreciated separately, like
equipment, machinery and processing facilities.
Summary:
-Medyo misleading yung term na “Development” kasi ito yung actual cost na talaga para sa pag extract at pag exploit the wasting assets
-Intangible Assets - Capitalized as Wasting Assets (Ex. Costs of drilling, cost of construction)
-Intangible Assets - Equipment na ginagamit, Mining properties etc (drilling cost, tunnel, and shaft). Not considered as Wasting Assets. But part of PPE na dapat may separate depreciation
Explain
✓ Restoration cost
Future cost to be paid to restore the
property back to its original condition but recorded as a provision (liability that is estimated) at its present value.
Entry for the total cost of the wasting asset (initial measurement)?
Dr. Natural Resource (Asset)
Cr. Cash
Cr. Asset retirement obligation (Amt equivalent to restoration costs)
Explain
Subsequent Measurement (2):
Like in PPE, either:
Cost Model - CA = Costs less Accumulated Depletion
Revaluation Model - Like in PPE
What is the usual method in computing Depletion Expense?
Production or output method
So in Output Method, how to compute the following:
- Depletable Amount?
- Depletion Rate?
- Depletion Expense?
- Depletable Amount=Cost (total costs above) less RV
- Depletion Rate per unit= Depletable Amount/Total estimated deposits (yung maeextact in units)
- Depletion Expense = Actual Units Extracted x Depletion Rate
So anong entry ng Depletion Expense?
Dr. Inventory
Cr. Accumulated Depletion (Contra account to Natural Resource/costs)
So anong entry to record sales from extracted units?
Dr. Cash
Cr. Sales
Dr. COGS
Cr. Inventory
Explain change in Estimates
When there is a charge in the units estimated to be extracted or when the company incurs additional costs, these are regarded as change in accounting estimate to be handled currently and prospectively. The company needs to compute for the NEW DEPLETION RATE per unit using this formula:
New depletion rate/unit =
Remaining revised depletion cost/
Remaining revised estimate of the
productive output
Depletion = Depletion rate per unit x units of extracted during the year
Depreciation of mining equipment
Again, as mentioned in the definition of Development Cost, costs can be classified either Tangible or Intangible. And Intangible lang dapat yung kasama sa Dev Cost tamaba?
So yung Tangible should be “Depreciated” separately.
Now, Tangible can further be classified as either Immovable or Movable.
Explain the procedure of depreciating them.
depreciation is based on the life of the equipment or life of the wasting asset WHICHEVER IS SHORTER but if the equipment is movable; the depreciation is based on the life of the equipment.
Immovable Equipment:
1) If the life of the equipment is SHORTER and assuming the use of straight-line method:
Depreciation = Depreciable cost/Useful life of the equipment
2) If the life of the wasting asset is shorter, the units of output method is often used:
Depreciation = Depreciation rate per unit
x units extracted during the year
-Wherein the DepRate is Depreciable Amount/Total Units
Movable Equipment:
Assuming the use of straight-line method only
Depreciation =Depreciable cost/Useful life of the equipment
NOTE: The Depreciation of the drilling used for exploration should be also part of the intangible exploration
Depreciation of mining equipment
Again, as mentioned in the definition of Development Cost, costs can be classified either Tangible or Intangible. And Intangible lang dapat yung kasama sa Dev Cost tamaba?
So yung Tangible should be “Depreciated” separately.
Now, Tangible can further be classified as either Immovable or Movable.
Explain the procedure of depreciating them.
depreciation is based on the life of the equipment or life of the wasting asset WHICHEVER IS SHORTER but if the equipment is movable; the depreciation is based on the life of the equipment.
Immovable Equipment:
1) If the life of the equipment is SHORTER and assuming the use of straight-line method:
Depreciation = Depreciable cost/Useful life of the equipment
2) If the life of the wasting asset is shorter, the units of output method is often used:
Depreciation = Depreciation rate per unit
x units extracted during the year
-Wherein the DepRate is Depreciable Amount/Total Units
Movable Equipment:
Assuming the use of straight-line method only
Depreciation =Depreciable cost/Useful life of the equipment
