Natural Resources and Depletion quiz #1 Flashcards
Natural Resources and Depletion quiz #1
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How is depletion expense for natural resources calculated, and what accounting entry is typically made when a company extracts a portion of a natural resource?
Depletion expense is calculated using the units of production method, which allocates the cost of the natural resource based on the quantity extracted. The typical accounting entry is to debit Depletion Expense and credit Accumulated Depletion for the amount calculated (cost per unit multiplied by units extracted). What is the net book value of a natural resource, and how does it change as the resource is extracted over time?
The net book value of a natural resource is the original cost minus accumulated depletion. As more of the resource is extracted and depletion expense is recorded, the net book value decreases over time. What are natural resources in accounting, and how do they differ from other long-term assets?
Natural resources are long-term assets that deplete as they are extracted, such as oil reserves, forests, and mineral deposits. Unlike other assets, their cost is allocated based on the quantity extracted rather than time. Which method is commonly used to calculate depletion expense for natural resources?
The units of production method is commonly used, allocating the cost based on the number of units extracted. What is the initial journal entry when a company purchases a natural resource like an oil reserve?
The company debits the natural resource asset account (e.g., oil reserve) and credits cash for the purchase amount. How do you calculate the cost per unit for depletion using the units of production method?
Divide the total cost of the natural resource by the estimated total number of units available (e.g., barrels of oil or number of trees). What is the typical accounting entry when a portion of a natural resource is extracted using the accumulated depletion method?
Debit Depletion Expense and credit Accumulated Depletion for the amount calculated (cost per unit multiplied by units extracted). How does the inventory method for recording depletion differ from the accumulated depletion method?
Instead of debiting depletion expense, the inventory method debits inventory (e.g., oil inventory) and credits accumulated depletion for the extracted amount. How is the net book value of a natural resource determined?
Net book value is calculated as the original cost of the resource minus accumulated depletion. What happens to the net book value of a natural resource as more of it is extracted over time?
The net book value decreases as depletion expense is recorded and more of the resource is extracted.