Lesson 14 Flashcards
What is another name for natural resources?
Wasting assets
What are examples natural resources?
petroleum, minerals, and timber
What are the two main features of natural resources?
- The complete removal (consumption) of the asset
- replacement of the asset only by an act of nature
Depletion
is the process of allocating the cost of natural resources to expense
What makes up the depletion base of natural resources?
- acquisition cost of the deposit
- exploration costs
- development costs
- restoration costs
acquisition cost
- is the price the company pays to obtain the property rights to search and find an undiscovered natural resource
- the price paid for an already discovered resource
- can be lease payments for property containing a productive natural resource (royalty costs)
Exploration costs
the costs incurred to find natural resources
If the exploration costs are substantial, companies ___________ the cost into the depletion base
capitalize
If costs and risks are significant and uncertain, most companies will ___________ these costs.
expense
Development costs
the costs incurred to extract natural resources and to get them ready for production or shipment
What are the two parts to development costs?
- tangible equipment costs
- intangible development costs
Tangible development cost
include all the transportation and equipment needed to extract the resource and get it ready for market.
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)
depletion base
Intangible development cost are considered part of the depletion base because ________.
They have no tangible characteristics but are still needed for the production of the natural resource. (drilling costs, tunnels, shafts, and wells)
Restoration costs
are cost to restore property to its natural state after extraction has occurred.
Restoration costs are included in the depletion base. True or False
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
How do you compute depletion?
Total Cost - Salvage Value divided by Total Estimated Units Available
How to record the depletion?
Debit Inventory (natural resource)
Credit Natural Resource (this reduces the carrying value of the natural resource)
How do companies record depletion expense?
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.
Usually, companies compute depletion for accounting purposes using which method?
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.