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Timber, fossil, mineral deposits, and other natural resources are different from
depreciable assets because they are physically extracted during company operations
and they are replaceable only through natural processes.
Cost of natural resources. The cost of natural resources includes all costs necessary
to acquire the resource and prepare it for extraction. If the property must be restored
after the natural resources are removed, the restoration costs are also considered to be
part of the cost.
Companies that search for new natural resources determine cost using one of two
approaches: the successful‐efforts approach or the full‐cost approach. Under
the successful‐efforts approach, exploration costs are considered part of the cost of
natural resources only when a productive natural resource is found. Unsuccessful
exploration costs are treated as expenses in the period during which they occur. Under
the full‐cost approach, all exploration costs are included in the cost of natural
resources. The approach that a company selects should be disclosed in the notes that
accompany the financial statements.
Suppose a company pays $50,000,000 for an existing gold mine estimated to contain
1,000,000 ounces of gold. The mine has no salvage value, so the depletable cost of
$50,000,000 is divided by 1,000,000 ounces to calculate a per‐unit depletion cost of $50
per ounce. If the company extracts and then sells 100,000 ounces of gold during the
year, depletion expense equals $5,000,000.
Calculating Units‐of‐Activity Depletion
One way to record depletion expense of $5,000,000 is to debit depletion expense for
$5,000,000 and credit accumulated depletionmine for $5,000,000.