5. Natural Resources

What are natural resources?

assets that are physically consumed when used.

Give examples of natural resources.

standing timber, mineral deposits, and oil and gas fields.

What type of assets are standing timber, mineral deposits, and oil and gas fields?

Noncurrent assets under their own category using a title such as Natural Resources. These assets are soon-to-be inventories of raw materials after cutting, mining, or pumping.

How are natural resources recorded for cost?

Natural resources are recorded at cost, which includes all expenditures to acquire the resource and prepare it for use.

What is depletion?

Process of allocating the cost of a natural resource to the period when it is consumed.

Which financial statement are natural resources reported on?

The balance sheet at cost - accumulated depletion.

What type of account is accumulated depletion?

A contra asset account with a normal credit balance.

What is depletion expense per period usually based on?

Units extracted from cutting, mining, or pumping. This is similar to units-of-production depreciation.

How many steps are there to calculate depletion expense for natural resources?

2

What are the 2 steps to calculate depletion expense for natural resources

1. Calculate depletion per unit

2. Calculate depletion expense

How do we calculate step 1, depletion per unit?

(cost - salvage value) / total units of capacity

How do we calculate step 2, depletion expense?

depletion expense = depletion per unit x units extracted and sold in period

How do we record depletion expense (if all units extracted in the year are sold in the period)?

debit Depletion Expense - Account name (such as Mineral Deposit), credit Accumulated Depletion - Account name.

Review figure 10.17 under natural resources cost determination and depletion

Review

If some of the ore mined this year remains unsold at year end, the depletion related to the unsold ore is carried forward on the balance sheet and reported as Ore Inventory, a current asset.

How do we record depletion expense (if all units extracted in the year are NOT sold in the period)?

debit Depletion Expense - Account name for depletion amount, debit Ore Inventory for leftover ore that was mined this year but wasn’t sold, credit Accumulated depletion - Account name for full amount mined.

Review example at end of Plant Assets tied into extracting

What does mining, cutting, or pumping natural resources require?

Requires machinery, equipment, and buildings.

If a plant asset’s (such as machinery, equipment, and buildings) is directly related to the depletion of a natural resource, how are their costs depreciated?

Their costs are depreciated using the units-of-production method in proportion to the depletion of the natural resource.

Review

For example, if a machine is permanently installed in a mine and 10% of the ore is mined and sold in the period, then 10% of the machine's cost (minus any salvage value) is depreciated. The same procedure is used when a machine is abandoned once resources are extracted. If the machine will be used at another site when extraction is completely, it is depreciated over its own useful life.

Review Need-To-Know 10-4

What is the entry to record the cost of a natural resource (such as a zinc mine)

debit Account Name (such as Zinc Mine), credit Cash