Natural Resources

Question 1

What is a natural resource?

Answer 1

A noncurrent asset that contains the cost of acquiring, exploring, and developing a natural resource deposit (e.g. timber, oil). It does not include the cost of extracting the resource

Question 2

What is the depletion rate formula?

Answer 2

(Natural Resources account balance - residual value)/(Total Estimated Units)

Question 3

What is “depletion”

Answer 3

Refers to the allocation of the cost of the natural resource to inventory

Question 4

What are the methods of accounting for exploration costs of Natural Resources?

Answer 4

1. ) Successful efforts method - Only the cost of successful exploration efforts is capitalized. Unsuccessful efforts are expensed
2. ) Full costing method - All costs for exploring for the resource are capitalized to the natural resources account.

Question 5

How are natural resources classified on the Balance Sheet?

Answer 5

As non-current assets

Question 6

What 3 costs are capitalized for Natural Resources?

Answer 6

1. ) Acquisition - Amount paid to acquire the rights to explore for undiscovered natural resources
2. ) Exploration costs - Amount paid to drill or excavate or any other cost of searching for natural resources
3. ) Development Costs - Amount paid after the resource has been discovered but before production begins

Question 7

What are extraction costs?

Answer 7

Depreciation on removable assets, wages, and material costs pertaining to the extraction effort - these costs are debited to the inventory of the resource - not to the natural resources account

Question 8

Does the successful-efforts method of depletion result in a higher or lower depletion rate?

Answer 8

Lower, but a higher exploration expense in period of significant exploration