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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Sharma Mining Co. acquired a mine lease for extracting ore. The reduction in the value of the lease as ore is extracted is best described as:

The reduction is called depletion. Mines, quarries and oil wells are wasting assets whose value falls as the natural resource is extracted and exhausted. The cause is extraction, not passage of time, technological change or physical wear of equipment, so amortisation, obsolescence and wear and tear do not fit.

  1. ADepletionCorrect
  2. BAmortisation due to passage of time
  3. CObsolescence
  4. DWear and tear

Explanation

For wasting assets such as mines, quarries and oil wells, the value falls as the natural resource is extracted. This exhaustion of the resource is called depletion. Amortisation relates to time-based write-off of intangibles or leases with fixed terms, which is not the cause stated here.

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