>> Natural resources are long term assets that consist of timber,
iron ore, oil, and minerals.
Sometimes, they're called wasting assets because they are physically used up over time.
Because of this, natural resources rarely have residual value.
Common characteristics include that they are physically extracted,
rather than use in production,
and they are replaced only by an act of nature.
You've learned that plant assets are depreciated as their values are used up over time.
Natural resources are depleted as their values are used up during extraction,
thus depletion is the process of allocating the cost of
a long term natural resource asset to expense over its useful life.
Normally, depletion expenses debited and
the natural resource asset is credited when depletion is recorded.
At the end of the video,
I'll show you an alternative way to record this journal entry.
When calculating depletion, we use a method you should already be familiar with,
the units of production method.
The formula for units of production is the asset cost,
minus the residual value,
divided by the useful life and total units.
This gives us a depletion rate per unit.
Then we take the depletion rate per unit and multiply
it by the actual units extracted for the period.
That result equals the amount of
annual depletion expense that we would record in our adjusting journal entry.
So let's look at an example.
On January 1, the English Beat purchases the rights
to extract 1,000 pounds of gold from a gold mine.
The cost of the rights to the gold is one million dollars.
So the journal entry to record the purchase of the rights of the gold is
a debit to gold mine reserve and a credit to cash for one million dollars.
Using the units of production method,
let's calculate the amount of depletion expense,
assuming 200 pounds of gold was extracted in the first year.
Then we will present natural resources assets book value at the end of the year.
The formula is cost minus residual value divided by the useful life in terms of units.
So the cost of one million dollars divided by 1,000
pounds of gold gives us a depletion rate of $1,000 per pound.
So for every pound of gold extracted,
$1,000 of depletion expense will be recorded.
If the actual gold extraction in year one was 200 pounds,
then the amount of depletion expense is $200,000.
We get this by multiplying the 200 actual
pounds times the depletion rate of $1,000 per pound.
We can record the adjusting journal entry by debiting depletion expense and
crediting gold mine reserve for $200,000.
Alternatively, some companies might use an accumulated depletion account,
rather than crediting the natural resource asset directly.
This isn't necessary, like it is with plant assets
since the natural resource asset will be gone once it's fully depleted.
But some companies and some textbooks might choose to do this,
so it's best to be aware.
Finally, the book value of
a goldmine reserve and this example is the cost of one million dollars
minus the accumulated depletion of $200,000 equals net book value of $800,000.