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Depletion of Natural Resources Explained

This document discusses depletion as it relates to natural resources. Depletion is the allocation of the cost of natural resources over their useful life through expense. It is calculated using the units-of-activity method, with depletion expense equaling the cost per unit extracted. An example is provided to demonstrate calculating depletion expense for a mine based on tons extracted during the year.

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Umal Malik
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62 views5 pages

Depletion of Natural Resources Explained

This document discusses depletion as it relates to natural resources. Depletion is the allocation of the cost of natural resources over their useful life through expense. It is calculated using the units-of-activity method, with depletion expense equaling the cost per unit extracted. An example is provided to demonstrate calculating depletion expense for a mine based on tons extracted during the year.

Uploaded by

Umal Malik
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

NATURAL RESOURCES

STUDY OBJECTIVE 7

• Natural resources
– consists of standing timber and underground deposits
of oil, gas, and minerals
• These long-lived productive assets have two
distinguishing characteristics:
1 They are physically extracted in operations.
2 They are replaceable only by an act of nature.
DEPLETION

DEPLETION
• Allocation of the cost of natural
resources to expense in a rational and
systematic manner over the resource’s
useful life.
• Units-of-activity method is generally
used to compute depletion.
– depletion generally is a function of the units
extracted during the year
FORMULA TO COMPUTE
DEPLETION EXPENSE
Total Cost minus  Total Estimated Depletion
Salvage Value  Units Cost per
Unit

Number of
Depletion
Units Annual
Cost per
Extracted Depletion
Unit
and Sold Expense

Helpful hint: This computation for depletion is


similar to the computation for depreciation using
the units-of-activity method of depreciation.
RECORDING DEPLETION

The Lane Coal Company invests $5 million in a mine estimated to


have 10 million tons of coal and no salvage value. In the first
year, 800,000 tons of coal are extracted and sold. Using the
formulas, the calculations are as follows:
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 X 800,000 = $400,000 depletion expense

The entry to record depletion expense for the first year of


operations is as follows:

Depletion Expense 400,000


Accumulated Depletion 400,000
STATEMENT PRESENTATION OF
ACCUMULATED DEPLETION

Accumulated Depletion is a contra asset account


similar to accumulated depreciation. It is deducted
from the cost of the natural resource in the balance
sheet as follows:

Lane Coal Company


Balance Sheet (partial)
Coal mine $5,000,000
Less: Accumulated
depletion 400,000 $4,600,000

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