Depreciation Method

Question 1

What are the JE for Natural Resources under Successful Effort and Full Cost Method

Answer 1

Example:
This illustrates the flow of the various cost types, the calculation of depletion, and recognition of cost of goods sold.

Acquisition cost of mine 	$400,000
Exploration costs, year 1
    Successful 	$50,000
    Unsuccessful 	$150,000
Development costs 	$500,000
Extraction and production costs 	$200,000
Total estimated tons of ore 	100,000
Estimated residual value 	$ 20,000
Tons removed in year 1 	40,000
Tons sold in year 1 	30,000

Entries:

Successful Efforts Full costing

Natural resources 950,000* 1,100,000#
Exploration expense 150,000
Cash 1,100,000 1,100,000
* $400,000 + $50,000 + $500,000
# $400,000 + $50,000 + $500,000 + $150,000
Note that full costing capitalizes all exploration costs whereas the successful efforts method capitalizes only the successful efforts and expenses the rest.
Inventory of ore 372,000* 432,000#
Accumulated depletion 372,000 432,000
* (($950,000 - $20,000)/100,000 total tons)(40,000 tons removed)
# (($1,100,000 - $20,000)/100,000 total tons)(40,000 tons removed)
Accumulated depletion is contra to the natural resources account. The amounts in this entry for the two methods are the reductions in the book value of the natural resources account allocated to the inventory account. The depletion base is depleted, with the resources flowing to the inventory account. There is no change in net assets or income at this point.
Inventory of ore 200,000 200,000
Cash, materials, wages payable 200,000 200,000
The extraction and production costs also increase the inventory account. There is no income effect at this point because no inventory has been sold. Inventory cost has three components: depletion, extraction, and production.
Cost of goods sold 429,000* 474,000#
Inventory of ore 429,000 474,000
* ($372,000 + $200,000)(30,000/40,000)
# ($432,000 + $200,000)(30,000/40,000)
Of the 40,000 tons removed in the period, 30,000 were sold. Therefore, three-fourths of the inventory cost is expensed. One-fourth of the inventory cost will appear in the ending balance sheet of the firm. The entry to record the sale is not shown. It would be the same for both methods: dr. Accounts receivable, cr. Sales.