Lesson 14

Question 1

What is another name for natural resources?

Answer 1

Wasting assets

Question 2

What are examples natural resources?

Answer 2

petroleum, minerals, and timber

Question 3

What are the two main features of natural resources?

Answer 3

1. The complete removal (consumption) of the asset
2. replacement of the asset only by an act of nature

Question 4

Depletion

Answer 4

is the process of allocating the cost of natural resources to expense

Question 5

What makes up the depletion base of natural resources?

Answer 5

1. acquisition cost of the deposit
2. exploration costs
3. development costs
4. restoration costs

Question 6

acquisition cost

Answer 6

1. is the price the company pays to obtain the property rights to search and find an undiscovered natural resource
2. the price paid for an already discovered resource
3. can be lease payments for property containing a productive natural resource (royalty costs)

Question 7

Exploration costs

Answer 7

the costs incurred to find natural resources

Question 8

If the exploration costs are substantial, companies ___________ the cost into the depletion base

Answer 8

capitalize

Question 9

If costs and risks are significant and uncertain, most companies will ___________ these costs.

Answer 9

expense

Question 10

Development costs

Answer 10

the costs incurred to extract natural resources and to get them ready for production or shipment

Question 11

What are the two parts to development costs?

Answer 11

1. tangible equipment costs
2. intangible development costs

Question 12

Tangible development cost

Answer 12

include all the transportation and equipment needed to extract the resource and get it ready for market.

Question 13

If the tangible equipment can be moved from place to place it is not included in the __________________. If the equipment cannot be moved (drilling rig foundation) companies depreciate these assets over their useful life or the life of the resource (whichever is shorter)

Answer 13

depletion base

Question 14

Intangible development cost are considered part of the depletion base because ________.

Answer 14

They have no tangible characteristics but are still needed for the production of the natural resource. (drilling costs, tunnels, shafts, and wells)

Question 15

Restoration costs

Answer 15

are cost to restore property to its natural state after extraction has occurred.

Question 16

Restoration costs are included in the depletion base. True or False

Answer 16

True.
The amount included is the fair value of the obligation to restore the property after extraction.
Companies deduct from the depletion base any salvage value to be received on the property

Question 17

How do you compute depletion?

Answer 17

Total Cost - Salvage Value divided by Total Estimated Units Available

Question 18

How to record the depletion?

Answer 18

Debit Inventory (natural resource)
Credit Natural Resource (this reduces the carrying value of the natural resource)

Question 19

How do companies record depletion expense?

Answer 19

It is usually part of cost of goods sold.

The depletion cost is posted to inventory as the natural resource is extracted. When the inventory is sold, this depletion expense is included in cost of goods sold.

Question 20

Usually, companies compute depletion for accounting purposes using which method?

Answer 20

Units-of-production method

Companies compute depletion using the units-of-production method which is a function of the number of units extracted during the period.