AE 121 DEPLETION
Prepared by: Joseph R. Mendoza CPA ,MBA
WASTING ASSETS (Natural Resources) – include coal, oil, ore, precious metals (gold, silver, etc.) and timber which are produced by
nature. They are physically consumed and irreplaceable, except by the process of nature.
COSTS of wasting asset
1. ACQUISITION costs – incurred to obtain the property containing the natural resources
2. EXPLORATION costs – incurred to locate the natural resources. It includes acquisition of right to explore, geological survey,
exploratory drilling, trenching and sampling.
3. INTANGIBLE Development costs – incurred to exploit (extract) the natural resources successfully located. It includes costs for
drilling, sinking mine shaft and wells construction.
4. RESTORATION costs – to be incurred after the extraction of natural resources, in order to restore the property to its original condition.
Accounted for only if it is a present obligation required by law or contract.
must be at present value (discounted) of costs to be incurred in the future.
DEPLETION – systematic allocation of the depletable amount of wasting asset over the period the natural resource is
extracted or produced.
follows the same principle as DEPRECIATION of PPE.
Acquisition cost
Pxx
SUCCESSFUL EFFORT method – include only cost for successful exploration
Exploration cost
xx
Development cost
xx
FULL cost Method – include all exploration costs.
Estimated restoration cost (at PV)
xx
Total Cost
Pxx
Residual value (of land)
(xx)
Depletable amount
Pxx
OUTPUT (PRODUCTION) method
DEPLETION/year = rate per unit x annual units produced
Rate per unit = Depletable Amount / total estimated resources (in units of output)
REVISION of Depletion rate – due to change in estimated resources and or increase in development costs.
treated currently and prospectively
Rate per unit = Depletable Amount balance / remaining estimated resources (in units of output)
R/E (FREE or unappropriated)
(xx)
Liquidating dividend (return of capital)
Pxx
DEBITED to the account “capital liquidated” and presented as deduction from the total shareholders‘ equity.
TFD
R/E (FREE or unappropriated)
IF Share dividends
Capital liquidated prior years
(xx)
Unrealized depletion in ending inventory
(xx)
Pxx