Chapter 3 Natural Resources

By Samson Worku
(Ph.D. Candidate, MBA, MA, BA, B.Sc., COC certified)

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 1

 Study Objectives
1. Define natural resources
2. Determine the cost of natural resources
3. Calculate depletion of natural resources
3

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 2

 Defining Ntural Reourcess

Natural Resources refer to minerals, oil, coal, timber etc.

The portion of the cost assigned to property containing

natural resources that is applicable to the units removed

from the property is known as depletion.

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 3

 Cost of Natural Resources

There are three types of costs incurred in acquiring and

preparing various natural resources.

1. Purchase price: Amounts paid to the seller for the

natural resource.
2. Exploration cots: Amounts paid to find the natural
resources. This cost is usually associated with oil.
3. Development costs: Amounts paid to prepare the
resource site for mining. These include drilling costs,
extraction costs, and the construction of tunnels,
shafts, and wells.
JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 4
 Example: Pink Oil Company purchased a coal mine and
pays the seller $110,000. It also incurs $30,000 in
exploration and $70,000 in development cost.

Required: Determine the cost of the natural resource and

journalize the purchase of the natural resource.

Solution:

Coal Mine ……………………. 210,000

Cash ……………………….. 210,000

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 5

 Depletion of Natural Resource
Natural resources become physical consumed with time.
Generally, the units of production method is used to
determine depletion.
Steps in calculating depletion:
(a) Calculate the depletion rate.
(b) Calculate the depletion expense.
Each year the company makes the following journal entry:
Depletion Expense ………………… xxxx
Accumulated Depletion ………. xxxx

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 6

 If costs must be incurred to prepare the barren land for resale
once the natural resource has been removed, these costs
reduce the salvage value.
Example:
Land is purchased that contain coal mine. The coal mine is
completely exhausted over time, and the company now
wishes to sell the land for $10,000. However, the buyer will
pay this price unless, the coal mine is filled and covered-a
process that will cost $2,000. The salvage value is therefore
only $8,000.

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 7

 Exercise:
Jerusalem Coal Corporation purchases land containing a coal
mine for $50,000 and incur exploration and development
costs of $10,000 and $20,000 respectively. The salvage value
of the land is $6,000, but $1,000 must be spent to prepare it
for sale. If geologists estimate that the land mine contains
10,000 tons and if the corporation mines and sells 2,000 tons
during the first year, what is the depletion expense. Show
also the necessary journal entry.

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 8

 Financial Statement Presentation

On the balance sheet the coal mine should be presented as

follows:
Coal Mine……………………….….. $80,000
Less: Accumulated Depletion ……. 15,000
Net Asset …………………………… $65,000
On the income statement the depletion expense will be
deducted from sales to determine income for the period.

JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 9