Question 1

The possible methods for accounting for pre-production costs in the extractive industries include:

Accepted Answer

A)  costs-written-off-and-reinstated method and ABC-cost method. 
B)  successful-effort method and area-of-interest method. 
C)  reserve-accounting method and successful-effort method. 
D)  percentage-of-completion method and costs-written-off-and-reinstated method. 
A)  costs-written-off-and-reinstated method and ABC-cost method. 
B)  successful-effort method and area-of-interest method. 
C)  reserve-accounting method and successful-effort method. 
D)  percentage-of-completion method and costs-written-off-and-reinstated method.

Question 2

Discuss the circumstances that indicate the need to test exploration and evaluation assets for impairment.

Accepted Answer

Exploration and evaluation assets are ty

Question 3

When deciding,under the area of interest method,to what extent costs should be written off or carried forward AASB 6 requires that:

Accepted Answer

A)  all activities should be considered to best reflect the position of the firm. 
B)  each area of interest as delimited by the firm to be considered separately. 
C)  exploration and evaluation costs must be carried forward. 
D)  each area of interest as delimited by the firm to be considered separately and exploration and evaluation costs must be carried forward. 
A)  all activities should be considered to best reflect the position of the firm. 
B)  each area of interest as delimited by the firm to be considered separately. 
C)  exploration and evaluation costs must be carried forward. 
D)  each area of interest as delimited by the firm to be considered separately and exploration and evaluation costs must be carried forward.

Question 4

Berrill Ltd is a mining firm incorporated on 1 July 2012 to engage in the exploration of iron ore in southern New South Wales.On 30 June 2013 the records show that the entity had incurred the following exploration and evaluation costs for area of interest A and area of interest B.
$$\begin{array} { | l | l | l | } 
\hline & \text { Area of interest } \mathrm { A } & \text { Area of interest B } \
\hline \text { Acquisition costs - mining tenements } & \$ 100000 & \$ 200000 \
\hline \text { Exploration costs } & 300000 & 200000 \
\hline \text { Evaluation costs } & 200000 & 100000 \
\hline \text { Total } & \$ 600000 & \$ 500000 \
\hline
\end{array}$$ On 30 June 2013 area of interest B was evaluated by the board of directors to be not economically feasible and abandoned the site.
What is the effect of the above transactions on the statement of financial position and the statement of comprehensive income of Berrill Ltd using the full-cost method?

Accepted Answer

A) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 1.1 \text { million } & \text { No effect } \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 0.6 \text { million } & \text { Increase expense by } \$ 0.5 \text { million } \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 0.5 \text { million } & \text { Increase expense by } \$ 0.6 \text { million } \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 0.5 \text { million } & \text { No effect } \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 1.1 \text { million } & \text { No effect } \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 0.6 \text { million } & \text { Increase expense by } \$ 0.5 \text { million } \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 0.5 \text { million } & \text { Increase expense by } \$ 0.6 \text { million } \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | } 
\hline \text { Statement of financial position } & \text { Statement of comprehensive income } \
\hline \text { Increase asset by } \$ 0.5 \text { million } & \text { No effect } \
\hline
\end{array}$$

Question 5

AASB 6 deals with the financial recording and performance of an entity and must be applied by all companies.

Accepted Answer

A) True 
 B)False

Question 6

Greasy Ltd has a mining operation in Western Australia.It has reached the production stage with $10 million in costs carried forward.The company is leasing the mining rights to the area and at the beginning of this period the remaining term on the lease is 99 years.The expected production in tonnes from the area is 8 million.In the current period 500 000 tonnes were extracted.Revenues are expected to be highest in the early years of the mine's life and to decline at a rate of 15% per annum.How much of the accumulated costs should be allocated to production this period (round to the nearest dollar)?

Accepted Answer

A)  $101 010 
B)  $625 000 
C)  $75 000 
D)  $150 000 
A)  $101 010 
B)  $625 000 
C)  $75 000 
D)  $150 000

Question 7

Guidance regarding an entity's responsibility for restoration costs is embodied in:

Accepted Answer

A)  AASB 6 Exploration for and Evaluation of Mineral Resources. 
B)  AASB 110 Events After the Balance Sheet Date. 
C)  AASB 137 Provisions, Contingent Liabilities and Contingent Assets. 
D)  AASB 6, AASB 110 and AASB 137. 
A)  AASB 6 Exploration for and Evaluation of Mineral Resources. 
B)  AASB 110 Events After the Balance Sheet Date. 
C)  AASB 137 Provisions, Contingent Liabilities and Contingent Assets. 
D)  AASB 6, AASB 110 and AASB 137.

Question 8

By allowing a choice about the treatment of pre-production costs relating to an area of interest,AASB 6 reduces the level of comparability that could otherwise have been achieved through the standard.

Accepted Answer

A) True 
 B)False

Question 9

The costs-written-off-and-reinstated method permits the reversal of exploration and evaluation expenses recorded in an earlier period in order to record an asset,and it is consistent with the AASB Framework.

Accepted Answer

A) True 
 B)False

Question 10

How are the proceeds of the sale of product from the pre-production stage to be treated under AASB 6?

Accepted Answer

A)  Material revenues earned from the sale of product at the pre-production stage should be transferred to a reserve and recognised when the production revenues come on line. Immaterial revenues from sales at the pre-production stage are to be netted against costs incurred in the period for the area of interest. 
B)  Revenue earned from pre-production sales is to be treated as a reserve and recognised once production revenues come on stream so that the accumulated costs for an area can be amortised against the total revenues earned from the area. 
C)  Immaterial proceeds should be offset against the relevant pre-production costs, while material proceeds should be treated as production revenue and the costs of producing the product sold deducted from the revenue as cost of sales. 
D)  Any revenue earned at any stage of production should be recognised as revenue in the period earned. When the revenue is earned at the pre-production stage and costs are being capitalised, those costs may continue to be capitalised until revenues from production are generated. The accumulated costs are then to be amortised against the post-production revenues. 
A)  Material revenues earned from the sale of product at the pre-production stage should be transferred to a reserve and recognised when the production revenues come on line. Immaterial revenues from sales at the pre-production stage are to be netted against costs incurred in the period for the area of interest. 
B)  Revenue earned from pre-production sales is to be treated as a reserve and recognised once production revenues come on stream so that the accumulated costs for an area can be amortised against the total revenues earned from the area. 
C)  Immaterial proceeds should be offset against the relevant pre-production costs, while material proceeds should be treated as production revenue and the costs of producing the product sold deducted from the revenue as cost of sales. 
D)  Any revenue earned at any stage of production should be recognised as revenue in the period earned. When the revenue is earned at the pre-production stage and costs are being capitalised, those costs may continue to be capitalised until revenues from production are generated. The accumulated costs are then to be amortised against the post-production revenues.

Question 11

Disclosures related to restoration costs:

Accepted Answer

A)  are not covered by AASB 6 and are therefore not required. 
B)  should only be reported in the notes to the accounts once they have been completed. 
C)  are required by AASB 137. 
D)  must include the reason why restoration is being undertaken-legal, voluntary, etc. 
A)  are not covered by AASB 6 and are therefore not required. 
B)  should only be reported in the notes to the accounts once they have been completed. 
C)  are required by AASB 137. 
D)  must include the reason why restoration is being undertaken-legal, voluntary, etc.

Question 12

AASB 1022,a predecessor to AASB 6,divides extractive industry operations into five phases.These are:

Accepted Answer

A)  exploitation, feasibility, establishment, commissioning and manufacturing. 
B)  identification, valuation, development, construction and production. 
C)  exploration, assessment, research, development and production. 
D)  exploration, evaluation, development, construction and production. 
A)  exploitation, feasibility, establishment, commissioning and manufacturing. 
B)  identification, valuation, development, construction and production. 
C)  exploration, assessment, research, development and production. 
D)  exploration, evaluation, development, construction and production.

Question 13

Which of the following statements is not in accordance with AASB 6 Exploration for and Evaluation of Mineral Resources?

Accepted Answer

A)  The carried-forward expenditure is required to be subject to regular impairment testing. 
B)  Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. 
C)  When the carrying amount exceeds the recoverable amount, an entity shall measure, present and disclose any resulting impairment loss. 
D)  An entity is not permitted to change its accounting policies for exploration and evaluation expenditures even if the change makes the financial report more relevant to the economic decision making needs of users. 
A)  The carried-forward expenditure is required to be subject to regular impairment testing. 
B)  Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. 
C)  When the carrying amount exceeds the recoverable amount, an entity shall measure, present and disclose any resulting impairment loss. 
D)  An entity is not permitted to change its accounting policies for exploration and evaluation expenditures even if the change makes the financial report more relevant to the economic decision making needs of users.

Question 14

Exploration and evaluation assets are depreciated when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.

Accepted Answer

A) True 
 B)False

Question 15

Sales revenue may be brought to account when the product is in the form in which it is to be sold even though the property to the product has not passed to the purchaser under certain conditions.These conditions include:

Accepted Answer

A)  A firm order has been placed by a regular customer with a consistent track record of paying on time. 
B)  The market for the product is liquid enough that the product may be considered to be effectively equivalent to cash when it is ready for sale. 
C)  The product has moved from the physical control of the vendor under an enforceable contract. 
D)  The product is in the nature of precious gems or gold. 
A)  A firm order has been placed by a regular customer with a consistent track record of paying on time. 
B)  The market for the product is liquid enough that the product may be considered to be effectively equivalent to cash when it is ready for sale. 
C)  The product has moved from the physical control of the vendor under an enforceable contract. 
D)  The product is in the nature of precious gems or gold.

Question 16

Positive accounting theory predicts that large sized entities will choose not to capitalise their exploration and evaluation expenditures to reduce political costs.

Accepted Answer

A) True 
 B)False

Question 17

On 1 April 2013,Ulladulla Mining Ltd assessed that its Mollymook area of interest contained economically recoverable reserves of 50 000 ounces of gold.On the same day the entity installed the following assets: $$\begin{array} { | l | r | r | } 
\hline & \text { Cost } & \text { Useful life } \
\hline \text { Mine site building } & \$ 1500000 & 20 \text { years } \
\hline \text { Mining equipment } & 2400000 & 15 \text { years } \
\hline \text { Machineries and equipment (portable) } & 750000 & 8 \text { years } \
\hline
\end{array}$$ The above assets were ready for use on 1 July 2013.Ulladulla Mining Ltd expects to extract the entire reserves in 5 years.For the year ending 30 June 2014 the entity had extracted 5000 ounces of gold.
What is the journal entry to recognise amortisation and depreciation expense of above capitalised developments costs?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 18

AASB 6 defines economically recoverable reserves to be:

Accepted Answer

A)  the only source of revenue for firms in the extractive industries. 
B)  the quantity of product that can be extracted before the firm makes a loss. 
C)  the quantity of product that can be extracted, processed and sold at a profit based on past economic conditions. 
D)  the estimated quantity of the product in the area of interest that can be expected to be profitably extracted and sold under current and foreseeable economic conditions. 
A)  the only source of revenue for firms in the extractive industries. 
B)  the quantity of product that can be extracted before the firm makes a loss. 
C)  the quantity of product that can be extracted, processed and sold at a profit based on past economic conditions. 
D)  the estimated quantity of the product in the area of interest that can be expected to be profitably extracted and sold under current and foreseeable economic conditions.

Question 19

AASB 6 Exploration for and Evaluation of Mineral Resources allows an entity to apply either the cost model or the revaluation model to the exploration and evaluation assets.

Accepted Answer

A) True 
 B)False

Question 20

Factors to be considered in reassessing the estimate of recoverable reserves each year include:

Accepted Answer

A)  the past production rate compared to total estimated reserves. 
B)  the possibility that technological developments or discoveries may make the product obsolete or uneconomical at some future time. 
C)  changes in technology, market or economic conditions affecting either sales prices or production costs, with a consequent impact on cut-off grades. 
D)  the possibility that technological developments or discoveries may make the product obsolete or uneconomical at some future time and changes in technology, market or economic conditions affecting either sales prices or production costs, with a consequent impact on cut-off grades. 
A)  the past production rate compared to total estimated reserves. 
B)  the possibility that technological developments or discoveries may make the product obsolete or uneconomical at some future time. 
C)  changes in technology, market or economic conditions affecting either sales prices or production costs, with a consequent impact on cut-off grades. 
D)  the possibility that technological developments or discoveries may make the product obsolete or uneconomical at some future time and changes in technology, market or economic conditions affecting either sales prices or production costs, with a consequent impact on cut-off grades.

Exam 20: Accounting for the Extractive Industries

The possible methods for accounting for pre-production costs in the extractive industries include:

Discuss the circumstances that indicate the need to test exploration and evaluation assets for impairment.

When deciding,under the area of interest method,to what extent costs should be written off or carried forward AASB 6 requires that:

AASB 6 deals with the financial recording and performance of an entity and must be applied by all companies.

Guidance regarding an entity's responsibility for restoration costs is embodied in:

By allowing a choice about the treatment of pre-production costs relating to an area of interest,AASB 6 reduces the level of comparability that could otherwise have been achieved through the standard.

The costs-written-off-and-reinstated method permits the reversal of exploration and evaluation expenses recorded in an earlier period in order to record an asset,and it is consistent with the AASB Framework.

How are the proceeds of the sale of product from the pre-production stage to be treated under AASB 6?

Disclosures related to restoration costs:

AASB 1022,a predecessor to AASB 6,divides extractive industry operations into five phases.These are:

Which of the following statements is not in accordance with AASB 6 Exploration for and Evaluation of Mineral Resources?

Exploration and evaluation assets are depreciated when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.

Sales revenue may be brought to account when the product is in the form in which it is to be sold even though the property to the product has not passed to the purchaser under certain conditions.These conditions include:

Positive accounting theory predicts that large sized entities will choose not to capitalise their exploration and evaluation expenditures to reduce political costs.

AASB 6 defines economically recoverable reserves to be:

AASB 6 Exploration for and Evaluation of Mineral Resources allows an entity to apply either the cost model or the revaluation model to the exploration and evaluation assets.

Factors to be considered in reassessing the estimate of recoverable reserves each year include:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Accounting

An Overview of Accounting for Assets

Depreciation of Property, plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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