Natural Resources

mayo 3, 2022 9:26 am Published by Leave your thoughts

the accumulated depletion of a natural resource is reported on the

In such a case, the company computes the depreciation using the productivity of the asset for the partial year. The units-of-activity method is not nearly as popular as the straight-line method primarily because it is often diffi cult for companies to reasonably esti- mate total activity. However, some very large companies, such as Chevron , do use this method. When the productivity of an asset varies signifi cantly from one period to another, the units-of-activity method results in the best matching of expenses with revenues. Sales taxes, freight charges, and insurance during transit paid by the purchaser.

The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use. For example, the cost of a new parking lot for a Hero Supermarket includes the amount paid for paving, fencing, and lighting.

Accounting Principles I

However, over the depreciable life of the asset, the total depreciation expense taken will be the same, no matter which method the entity chooses. For example, in the current example both straight-line and double-declining-balance depreciation will provide a total depreciation expense of $48,000 over its five-year depreciable life. Amortization is the way accountants assign the period concept in financial statements based on accrual. For example, expenses and income get recorded in the period concerned instead of when the money changes hands. You wouldn’t charge the whole cost of a new building in the acquisition year because the life of the asset would extend many years.

the accumulated depletion of a natural resource is reported on the

At the end of year three , it estimated the new total life to be 10 years and the new residual value to be £2,000. Because fi nancial calculators do not typically solve for the n th root, we have chosen to present the declining-balance method.

Calculating Depreciation Costs

With liabilities, amortization often gets applied to deferred revenue, such as cash payments usually received before delivery of services or goods. In order to secure the tax deduction, a company must follow the IRS rules while depreciating their assets. The IRS has fixed rules on how and when a company can claim such deductions. Lane records depletion expense for the fi rst the accumulated depletion of a natural resource is reported on the year of operation as follows. Helpful Hint The method recommended for an asset that is expected to be signifi cantly more productive in the fi rst half of its useful life is the declining-balance method. Any company that relies on equipment to generate revenues must make decisions about what kind of equipment to buy, how long to keep it, and how vigorously to maintain it.

The amortization expense is the asset’s cost of QR.3,000 divided by its economic life of five years, resulting in annual amortization of QR.600. The journal entry to record amortization requires a debit to amortization expense for QR.600 and a credit to the patent account for QR.600. The patent will have a book value of QR.2,400 after the amortization entry is posted.

Recommended explanations on Business-studies Textbooks

IFRS requires that assets must be assessed for circumstances of impairment at the end of each reporting period. Under U.S. GAAP, assets are tested for impairment only when events or changes in indicators suggest that book value may not be recoverable. Intangible assets with indefinite useful lives, including goodwill are tested for impairment annually. To this point we have discussed assets that were purchased at the beginning of a year and depreciated for a full year.

Thus, statement users can see the percentage of the resource that has been removed. To determine the total cost of the resource available, we combine this depletion cost with other extraction, mining, or removal costs. We can assign this total cost to either the cost of natural resources sold or the inventory of the natural resource still on hand. Thus, we could expense all, some, or none of the depletion and removal costs recognized in an accounting period, depending on the portion sold. If all of the resource is sold, we expense all of the depletion and removal costs. The cost of any portion not yet sold is part of the cost of inventory. Another contra asset listed on the balance sheet is accumulated depreciation.

Examples of Depreciable Property

One way to record depletion expense of $5,000,000 is to debit depletion expense for $5,000,000 and credit accumulated depletionmine for $5,000,000. Suppose a company pays $50,000,000 for an existing gold mine estimated to contain 1,000,000 ounces of gold. The mine has no salvage value, so the depletable cost of $50,000,000 is divided by 1,000,000 ounces to calculate a per‐unit depletion cost of $50 per ounce. If the company extracts and then sells 100,000 ounces of gold during the year, depletion expense equals $5,000,000. The cost of natural resources includes all costs necessary to acquire the resource and prepare it for extraction.

What is accumulated depletion in accounting?

What is Accumulated Depletion? Accumulated depletion is the amount of depletion expense that has built up over time in relation to the use of a natural resource. This amount is paired with the natural resource asset on the balance sheet as a contra account.

Examples are standing timber, mineral deposits, and oil and gas fields. Because they are consumed when used, they are often called wasting assets.

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