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” m larry. Walther this is nprinciplesofaccountingcom. Chapter. 11.
In this module. We will consider nnatural nnatural resource. Accounting. And the related.
Depletion. Charges. Now natural resources are things nthat. Come.
The earth. Examples include oil and ngas. Reserves. Mineral.
Deposits. Thermal. Energy. Sources.
Ntimber. Things of this nature. These. Assets.
Should initially be recorded. Nat. Their direct cost of acquisition. Plus related items.
Like legal fees. Nsurveying costs. Exploration and development costs. Potentially.
So. There is a host of costs that might nbe captured in the cost pool for a particular natural resource. That cost pool is allocated nover. The periods.
Benefited through a process known as depletion essentially depletion is to a natural nresource as depreciation is to property plant and equipment let s look at depletion in calculations. The cost of the natural resource nless. Any expected residual value should be divided by the estimated units nin. The resource pool of the resource base this results in an amount nof depletion per unit.
We ll look at an example nhere in just a moment if during a particular period. All nof. The resources that are extracted are also sold or disposed of then nthe depletion expense for the period would correspond to the depletion per unit times nthe number of units extracted and sold however if a portion of the extracted nresources remain unsold at the end of the period. Those costs should be carried non the balance sheet as inventory.
So let s look at an example here. We have a mine site. It was purchased nfor 9. Million.
And an additional 3 million was spent on development cost and npreparing. The site for production. The site is estimated. It contained n5 million tons of the targeted ore and at completion of the operation.
Nthe site is going to be water flooded and turned into a reservoir that we expect nto be able to sell for 2 million. So taking those facts into account nwe have a 9 million initial cost. Plus. The 3 million development cost nless.
The 2 million estimated residual value to arrive at the depletable nbase of 10 million divided by the 5 million. Tons gives us an expected ndepletion charge of 2 per ton continuing assume that nduring a particular period 1. Million tons of the ore are extracted that million tons would be nassigned a cost of 2 million again that s the 2 per unit times. Nthe million tons that were extracted so our total depletion charge is.
2 nmillion furthering. Our discussion though if 750000 of those tons are sold and. Nthe other 250000 tons are simply held in. Inventory nthen what we would have is.
1500000 of the depletion charge that nwould be assigned to cost of. Good sold that is 2 per. Ton. Times.
750000. Ntons extracted and sold the other 250000. Tons. That we keep in ninventory would be assigned their 2 per.
Unit cost and we would have 500000. That nwould be reported in the balance sheet. So here s a journal entry for ndepletion for this particular period. Here i m crediting.
The natural nresource 2. Million or alternatively. I could have simply ncredited accumulated depletion more likely just crediting nthe natural resource in this case 500000 of that cost is allocated or ndebited to inventory and. 1500000.
Winds up in nthe cost of goods sold account. So let s look further now thinking nabout property plant and equipment assets. That are used in connection with nthe extraction of natural resources obviously we re gonna need bulldozers nand cranes and mining equipment and things of that nature so we need to consider what we d ndo with those particular assets those assets will not be depleted. They will be depreciated along with our nother property plant and equipment.
The depreciation period. Should be nover. The useful life of the asset and sometimes the useful life of the asset. Nis tied directly to the natural resource life.
Even though. Its actual nphysical life might be longer. Let s imagine a train track nthat. We built down into a mine that we dig into the earth.
Well the train track might have na 100 year useful life. But if the mine s only gonna operate. We would ndepreciate that track over 20 years on the other hand if it was the rail car that runs on nthat track that has say a 50 year life after 20 years. We could move it to another nmine or sell it something of that nature.
We would probably use the longer nuseful life to depreciate that ” ..
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