{"id":196,"date":"2016-12-05T20:00:28","date_gmt":"2016-12-05T20:00:28","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/tc3-accounting1\/?post_type=chapter&p=196"},"modified":"2016-12-05T20:00:28","modified_gmt":"2016-12-05T20:00:28","slug":"journalizing-adjusting-entries-for-depletion","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tc3-accounting1\/chapter\/journalizing-adjusting-entries-for-depletion\/","title":{"raw":"Journalizing Adjusting Entries for Depletion","rendered":"Journalizing Adjusting Entries for Depletion"},"content":{"raw":"

Plant assets and natural resources are tangible assets used by a company to produce revenues.\u00a0 On the income statement,\u00a0depreciation expense is recorded for plant assets and depletion expense is recorded for natural resources.\u00a0\u00a0On the balance sheet, accumulated depreciation appears with the related plant asset account and accumulated depletion appears with the related natural resource account.\n\nRemember, the adjusting entry for depreciation, regardless of the method used to calculate depreciation was:\n<\/p>
Depreciation Expense<\/strong><\/td>\n\u00a0Debit\u00a0<\/strong><\/td>\n\u00a0\u00a0<\/strong><\/td>\n<\/tr>
\u00a0\u00a0\u00a0 Accumulated Depreciation<\/strong><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr><\/tbody><\/table>\nFor natural resources we will use Depletion Expense and Accumulated Depletion and the units of production method for calculating depletion.\u00a0 The journal entry to record depletion would be similar to depreciation:\n
Depletion Expense<\/strong><\/td>\n\u00a0Debit<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>
\u00a0\u00a0\u00a0 Accumulated Depletion<\/strong><\/td>\n\u00a0<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr><\/tbody><\/table>\nThe previous video gave us a demonstration of the accounting process for depletion but we will review\u00a0it here.\n\nComputing periodic depletion cost<\/strong> To compute depletion charges, companies usually use the units-of-production method. They divide total cost by the estimated number of units\u2014tons, barrels, or board feet\u2014that can be economically extracted from the property. This calculation provides a per-unit depletion cost. For example, assume that in 2015 a company paid\u00a0 $\u00a0650,000 for a tract of land containing ore deposits. The company spent\u00a0 $\u00a0100,000 in exploration costs. The results indicated that approximately 900,000 tons of ore can be removed economically from the land, after which the land will be worth\u00a0$50,000. The company incurred costs of\u00a0$200,000 to develop the site, including the cost of running power lines and building roads. Total cost subject to depletion is the net cost assignable to the natural resource plus the exploration and development costs. When the property is purchased, a journal entry assigns the purchase price to the two assets purchased\u2014the natural resource and the land. The entry would be:\n
\n\n\u00a0\n\nLand <\/strong><\/td>\n\n\nDebit<\/strong>\n\n50,000<\/strong><\/td>\n\n\nCredit<\/strong>\n\n\u00a0<\/strong><\/td>\n<\/tr>
Ore Deposits <\/strong><\/td>\n600,000<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>
Cash <\/strong><\/td>\n\u00a0<\/strong><\/td>\n650,000<\/strong><\/td>\n<\/tr>
To record purchase of land and mine.<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr><\/tbody><\/table>\nAfter the purchase, an entry debits all costs to develop the site (including exploration) to the natural resource account. The entry would be:\n
\n\n\u00a0\n\nOre Deposits ($100,000 + $200,000) <\/strong><\/td>\n\n\nDebit<\/strong>\n\n300,000<\/strong><\/td>\n\n\n\u00a0Credit<\/strong>\n\n\u00a0<\/td>\n<\/tr>
Cash <\/strong><\/td>\n\u00a0<\/strong><\/td>\n300,000<\/strong><\/td>\n<\/tr>
To record costs of exploration and development.<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr><\/tbody><\/table>\nUnder the units of production method, we use a 2-step process:\n
  1. Calculate\u00a0depletion cost per unit\u00a0 (Cost - salvage or residual value) \/ total amount expected to be used over its lifetime<\/li>\n\t
  2. Calculate depletion expense\u00a0 (units used this period x depletion per unit)<\/li>\n<\/ol>

    In some instances, companies buy only the right to extract the natural resource from someone else\u2019s land. When the land is not purchased, its residual value is irrelevant and should be ignored. If there is an obligation to restore the land to a usable condition, the firm adds these estimated restoration costs to the costs to develop the site.<\/p>\n

    In the example where the land was purchased, the total costs of the mineral deposits equal the cost of the site ($ 650,000) minus the residual value of land ($ 50,000) plus costs to develop the site ($ 300,000), or a total of\u00a0 $900,000. The unit (per ton) depletion charge is\u00a0$ 1 (or\u00a0$ 900,000 cost \/900,000 tons).\u00a0\u00a0 If 100,000 tons are mined in 2015, this entry records the depletion cost of\u00a0 $100,000 ($1 depletion per unit \u00a0X 100,000 tons mined) for the period:<\/p>\n\n
    \n\n\u00a0\n\nDepletion Expense<\/strong><\/td>\n\n\nDebit<\/strong>\n\n100,000<\/strong><\/td>\n\n\n\u00a0Credit<\/strong>\n\n\u00a0<\/td>\n<\/tr>
    Accumulated Depletion\u2014Ore Deposits <\/strong><\/td>\n\u00a0<\/strong><\/td>\n100,000<\/strong><\/td>\n<\/tr>
    To record depletion for 2015.<\/strong><\/td>\n<\/tr><\/tbody><\/table>\n\u00a0\n\nhttp:\/\/www.openassessments.org\/assessments\/1195","rendered":"

    Plant assets and natural resources are tangible assets used by a company to produce revenues.\u00a0 On the income statement,\u00a0depreciation expense is recorded for plant assets and depletion expense is recorded for natural resources.\u00a0\u00a0On the balance sheet, accumulated depreciation appears with the related plant asset account and accumulated depletion appears with the related natural resource account.<\/p>\n

    Remember, the adjusting entry for depreciation, regardless of the method used to calculate depreciation was:\n<\/p>\n\n\n\n\n
    Depreciation Expense<\/strong><\/td>\n\u00a0Debit\u00a0<\/strong><\/td>\n\u00a0\u00a0<\/strong><\/td>\n<\/tr>\n
    \u00a0\u00a0\u00a0 Accumulated Depreciation<\/strong><\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    For natural resources we will use Depletion Expense and Accumulated Depletion and the units of production method for calculating depletion.\u00a0 The journal entry to record depletion would be similar to depreciation:<\/p>\n\n\n\n\n
    Depletion Expense<\/strong><\/td>\n\u00a0Debit<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n
    \u00a0\u00a0\u00a0 Accumulated Depletion<\/strong><\/td>\n\u00a0<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    The previous video gave us a demonstration of the accounting process for depletion but we will review\u00a0it here.<\/p>\n

    Computing periodic depletion cost<\/strong> To compute depletion charges, companies usually use the units-of-production method. They divide total cost by the estimated number of units\u2014tons, barrels, or board feet\u2014that can be economically extracted from the property. This calculation provides a per-unit depletion cost. For example, assume that in 2015 a company paid\u00a0 $\u00a0650,000 for a tract of land containing ore deposits. The company spent\u00a0 $\u00a0100,000 in exploration costs. The results indicated that approximately 900,000 tons of ore can be removed economically from the land, after which the land will be worth\u00a0$50,000. The company incurred costs of\u00a0$200,000 to develop the site, including the cost of running power lines and building roads. Total cost subject to depletion is the net cost assignable to the natural resource plus the exploration and development costs. When the property is purchased, a journal entry assigns the purchase price to the two assets purchased\u2014the natural resource and the land. The entry would be:<\/p>\n\n\n\n\n\n\n
    \n

    \u00a0<\/p>\n

    Land <\/strong><\/td>\n

    		\n

    Debit<\/strong><\/p>\n

    50,000<\/strong><\/td>\n

    		\n

    Credit<\/strong><\/p>\n

    \u00a0<\/strong><\/td>\n<\/tr>\n

    Ore Deposits <\/strong><\/td>\n600,000<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n
    Cash <\/strong><\/td>\n\u00a0<\/strong><\/td>\n650,000<\/strong><\/td>\n<\/tr>\n
    To record purchase of land and mine.<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    After the purchase, an entry debits all costs to develop the site (including exploration) to the natural resource account. The entry would be:<\/p>\n\n\n\n\n\n
    \n

    \u00a0<\/p>\n

    Ore Deposits ($100,000 + $200,000) <\/strong><\/td>\n

    		\n

    Debit<\/strong><\/p>\n

    300,000<\/strong><\/td>\n

    		\n

    \u00a0Credit<\/strong><\/p>\n

    \u00a0<\/td>\n<\/tr>\n

    Cash <\/strong><\/td>\n\u00a0<\/strong><\/td>\n300,000<\/strong><\/td>\n<\/tr>\n
    To record costs of exploration and development.<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Under the units of production method, we use a 2-step process:<\/p>\n

      \n
    1. Calculate\u00a0depletion cost per unit\u00a0 (Cost – salvage or residual value) \/ total amount expected to be used over its lifetime<\/li>\n
    2. Calculate depletion expense\u00a0 (units used this period x depletion per unit)<\/li>\n<\/ol>\n

      In some instances, companies buy only the right to extract the natural resource from someone else\u2019s land. When the land is not purchased, its residual value is irrelevant and should be ignored. If there is an obligation to restore the land to a usable condition, the firm adds these estimated restoration costs to the costs to develop the site.<\/p>\n

      In the example where the land was purchased, the total costs of the mineral deposits equal the cost of the site ($ 650,000) minus the residual value of land ($ 50,000) plus costs to develop the site ($ 300,000), or a total of\u00a0 $900,000. The unit (per ton) depletion charge is\u00a0$ 1 (or\u00a0$ 900,000 cost \/900,000 tons).\u00a0\u00a0 If 100,000 tons are mined in 2015, this entry records the depletion cost of\u00a0 $100,000 ($1 depletion per unit \u00a0X 100,000 tons mined) for the period:<\/p>\n\n\n\n\n\n
      \n

      \u00a0<\/p>\n

      Depletion Expense<\/strong><\/td>\n

      		\n

      Debit<\/strong><\/p>\n

      100,000<\/strong><\/td>\n

      		\n

      \u00a0Credit<\/strong><\/p>\n

      \u00a0<\/td>\n<\/tr>\n

      Accumulated Depletion\u2014Ore Deposits <\/strong><\/td>\n\u00a0<\/strong><\/td>\n100,000<\/strong><\/td>\n<\/tr>\n
      To record depletion for 2015.<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      \u00a0<\/p>\n