Case1. Mining

You were assigned to auditGold DiggerCorp., (the Company), a mining firm based inBenguet, as at and for the year ended December 31, 2020. The Company was incorporated in May 2020and hasstarted commercial operations in the third quarter of the year.

The Company acquired a land withcopperonJune 30, 2020. It has obtained the necessary permits in August 2020to operate for a period of twenty years and started extraction thereafter. In October 2020, environmentalists filed cases against the client for environmental degradation. The client engaged services of an external legal counsel to handle the case, thus incurring litigation costs. Potential liabilityrangesfromP85,000,000to P135,000,000, with the best estimate at around P108,000,000. As of December 31, 2020, the legal counsel confirmed that there isan80% chance that the Company will lose the case and will have to pay the amount to the local government unit.Timing of settlement isuncertain butis expectedat the end oftwo years.Appropriate discount rate is 8%.

The finance managerofGold Digger, Corp.provided you with the following accounting information:

• Cost of land, P720,000,000
• Estimated cost of restorationto be incurred after the extraction period is P67,500,000. Appropriate discount rate is 8%.
• Government permits, P2,500,000
• Litigation costs incurred in relation to the case stated above, P3,500,000
• Mining equipment without alternative use after completion of extraction activities, estimated useful life is twenty-five years, P542,000,000, inclusive offreight, installation, and capitalized borrowing costs,commissioned on June 30, 2020
• Estimated fair value of land after restoration, P160,000,000
• Engineers estimate that output during the twenty-year extraction period is 50,000,000 metric tons.
• In the first year of operations, a total of 1,600,000 metric tons were extracted. 1,400,000 metric tons were sold.
• Further processing cost of minerals is P7.35 per metric ton.

Extract from the trial balanceof Gold Digger Corp.asatDecember 31, 2020 revealed the following information:

Account

Balance - Debit (Credit)

Inventory - copper

P1,470,000

Land

720,000,000

Natural Resource- Copper

-

Accumulated Depletion - Natural Resource- Copper

-

Mining Equipment

542,000,000

Accumulated Depreciation - Mining Equipment

(10,840,000)

Accretion Expense

1,687,500

Loss on litigation

135,000,000

How much should be the capitalized cost of wasting assetas at June 30, 2020?

Group of answer choices

P787,500,000

P580,482,004

P574,482,004

P734,482,004

Flag question: Question 2

Question 2

1pts

[Case 1] The adjustment to the Land account as at December 31, 2020 includes:

Group of answer choices

A credit for P560,000,000

A debit for P8,178,998

A credit for P17,920,000

A debit for P14,482,004

Flag question: Question 3

Question 3

1pts

[Case 1]How much is the depletion of thenatural resource per metric ton?

Group of answer choices

P15.7500

P14.6896

P11.4896

P11.6096

Flag question: Question 4

Question 4

1pts

[Case 1]How much is thedepletion expense in the income statementfor the year ended December 31, 2020?

Group of answer choices

P18,383,424

P23,503,424

P20,565,496

P16,085,496

Flag question: Question 5

Question 5

1pts

[Case 1]Assuming that there are no in-process inventories at the end of the year, how much isthe copper inventoryas at December 31, 2020?

Group of answer choices

P3,791,928

P3,767,928

P4,620,000

P4,407,928

Flag question: Question 6

Question 6

1pts

[Case 1]What should be the proposed adjustment for provision for litigations?

Group of answer choices

Dr. Provision for litigation P60,925,926; Cr. Loss on litigation P60,925,926

Dr. Provision for litigation P42,407,407; Cr. Loss on litigation P42,407,407

None. The amount recognized is a conservative estimate of the potential liability.

Dr. Provision for litigation P40,692,730; Cr. Loss on litigation P40,692,730

Flag question: Question 7

Question 7

1pts

[Case 1]What should be the proposed adjustment foraccretion expense?

Group of answer choices

Dr. Asset Retirement Obligation P843,750; Cr. Accretion Expense P843,750

Dr. Asset Retirement Obligation P528,940; Cr. Accretion Expense P528,940

Dr. Asset Retirement Obligation P1,108,220; Cr. Accretion Expense P1,108,220

None. The Accretion Expense per books is correct.

Flag question: Question 8

Question 8

1pts

[Case 1]How much is the asset retirement obligation as at December 31, 2020?

Group of answer choices

P15,061,284

P14,482,004

P843,750

P15,640,564

Flag question: Question 9

Question 9

1pts

[Case 1]How much is the book value of mining equipment as at December 31, 2020?

Group of answer choices

P524,656,000

P526,824,000

P528,450,000

P531,160,000

Flag question: Question 10

Question 10

1pts

[Case 1]The depreciation of mining equipment should be presented under

Group of answer choices

Cost of Goods Sold

Selling expenses

Administrative expenses

Other expenses

Flag question: Question 11

Question 11

1pts

[Case 1]The cash paid for the purchase ofminingequipmentshould be presented under ______ section of the Statement of Cash Flows.

Group of answer choices

Any of the above, depending on the company's policy

Financing

Operating

Investing

Flag question: Question 12

Question 12

1pts

[Case 1]What audit procedure isbest suitedto corroborateexistence of provisions for litigation?

Group of answer choices

Examine checks paid to the counterparties of the case.

Send confirmation letters to the client's legal counsels. Inquire about the status of the case, best estimates of the outcome and the amounts involved.

Rely on the representations of the client's accounting manager. Document these representations in the representation letter and have these signed by those charged with governance.

Examine court documents for details of the case filed, transcripts of hearings, and the client's representations.

Flag question: Question 13

Question 13

1pts

[Case 1]What should the auditors do in relation tothe work ofexperts?

Group of answer choices

Schedule an interview with these experts to cross-check their reports with contradictory audit evidence.

Scrutinize the work of the expert and determine the financial implications.

Reperform the work done by the experts independently.

Evaluate and document the qualifications and competencies of an expert and rely on their reports.

Flag question: Question 14

Question 14

1pts

[Case 1]For start-up companies likeGold Digger Corp., which would be the most appropriate basis for setting planning materiality?

Group of answer choices

Qualitative-based measure (non-financial KPIs such as efficiency and productivity)

Activity-based measures (revenues, operating expenses)

Earnings-based measures (net income, EBIT, EBITDA)

Capital-based measures (asset, equity)

Flag question: Question 15

Question 15

1pts

[Case 1]Which of the followingis least likely to be anexample ofakey audit matter for mining clients?

Group of answer choices

Going concern assumption

Revenue recognition

Recoverability of deferred exploration costs

Recoverability of property, plant and equipment

PLEASE INCLUDE SOLUTION