INTANGIBLE ASSETS and NATURAL RESOURCES 9252021 1 LEARNING

INTANGIBLE ASSETS and NATURAL RESOURCES 9/25/2021 1

LEARNING OBJECTIVES �Understand the concept and characteristics of Intangible Assets (IA). �Be familiar with the general accounting treatment for intangibles. �Be familiar with the accounting for other categories of IA, including deferred charges, leaseholds, organization costs, and licensing agreements. �Know how goodwill arises and how it 9/25/2021 2

LEARNING OBJECTIVES �Know the accounting treatment required for research and development costs. �Understand the accounting for the cost of computer software. �Understand the accounting issues and reporting for natural resources. �Understand the major (and controversial) issue in accounting for oil and gas exploration costs. 9/25/2021 3

Characteristics of IA They lack physical substance. 2. They possess future economic benefits (ownership rights) that can be difficult to measure. 3. Their useful life is often difficult to determine. 4. Generally they are acquired for operational use. 1. 9/25/2021 4

Classification of IA Manner of acquisition – IA can be acquired externally by purchase from another entity. (franchise and patent) 2. Identifiability – some IA can be separately identified from the other assets of the firm. (patent, trademarks, and franchise). 3. Exchangeability – identifiable IA that can be sold or purchased are exchangeable. (patent, franchise, and trademarks) 4. Period of expected benefit – some IA, such as organizational costs, have an 1. 9/25/2021 5

Basic Principles of Accounting for IA At acquisition, application of the cost principle. B. During the period of use, application of the matching principle, which requires that the expenses incurred and the revenues generated from those expenses should be recognized at the same time. C. At disposition, application of the revenue principle, under which a gain or loss is recognized on disposal equal to the difference between the consideration received and the book value of the asset sacrificed. A. 9/25/2021 6

Recording the Cost of IA �Cost includes all expenditures made to acquire the asset, including purchase price, transfer and legal fees, and any other expenditures related the acquisition. �The acquisition cost is the current market value of all considerations given, or of the asset received, whichever is more reliably determinable. �When an IA is acquired for noncash considerations, in whole or in part, its cost is any cash paid plus the current market value of the noncash consideration given. If that value cannot be determined reliably, then the market value of the right acquired is used. 9/25/2021 7

Amortizing the Cost of IA �The cost of an IA must be allocated to expense in a rational and systematic manner over the legal life or the estimated useful life of the asset, whichever is shorter, in conformity with the matching principle. 9/25/2021 8

The Factors that Influence the Estimating Life of IA � Legal, regulatory, or contractual provisions that may limit the maximum useful life. � Provisions for renewal or extension that may alter a specified limit on useful life. � Effects of obsolescence, demand, and other economic factors that may reduce useful life. � Useful life that may parallel the service life expectancies of individuals or groups of employees. � Expected actions of competitors and others that may restrict present competitive advantages. � An apparently unlimited useful life that may in fact be indefinite, and benefits that cannot be reasonably projected. � An IA that may be a composite of many individual factors with varying effective useful lives. 9/25/2021 9

Accounting Treatments for IA Type Manner of Acquisition Purchased Internally Generated Identifiable IA • • Capitalized • Amortize over the legal life or the estimated useful life, • whichever is shorter, with a maximum of 40 years. Expensed or capitalized depending on the specific intangible. If capitalized, amortize as for purchased intangibles. Unidentifiable IA • • Capitalized • Amortize over the • legal life or the estimated useful life, whichever is shorter, with a maximum of 40 years. Expensed as incurred There is no option to capitalize, thus there is no amortization. 9/25/2021 10

EXCHANGEABLE IA �EIA are IA that can be separately identified apart from other assets of the firm, and that can be sold separately. (patent, copyrights, franchise, and trademarks, but not organization costs). �They may be acquired externally by purchase or developed internally. �They are initially recorded at cost �Its cost is amortized and expensed in conformity with the matching principle. 9/25/2021 11

Patents �A patent is an exclusive right recognized by law and registered with the government. �A patent right enables the holder to use, manufacture, sell, and control the item, process, or activity covered by the patent without interference of infringement by others. �A patent does not become established until it has been successfully defended in court. �The cost of successful court defense should be capitalized as part of the cost 9/25/2021 12

Patents �If the suit is lost, the legal cost, as well as the unamortized cost of the patent, is written off. �The carrying amount of the patent is reduced to its impaired value, which could be zero. �An impairment loss should be debited for the amount of any write-down. �The only cost of an internally developed patent that can be capitalized are legal fees and other costs associated with registration of the patent, such as models and drawings required for the registration. �The laboratory costs leading to the development of the patent must be expensed as incurred. 9/25/2021 13

Illustration Assume that early in January 2005, Alto Company purchased a patent that cost $27, 200. The patent had a 17 -year legal life. However, it was purchased one year later that the registration date. During Year 2 (2006), Alto Company won a patent infringement suit. The cost for legal fees and court cost was $4, 750. 9/25/2021 14

Beginning of 2005 – Purchase of patent: Patent 27, 200 Cash 27, 200 End of 2005 – Amortization: Patent amortization exp 1, 700 Patent (Accumulated) 1, 700 (27, 200 : 16) During 2006 – Patent infringement suit: Patent 4, 750 Cash 4, 750 End of 2006 – Amortization: Patent amortization exp 2, 017 Patent (Accumulated) 2, 017 (27, 200 -1, 700+4, 750): 15 9/25/2021 15

Copyrights �A copyright is a form of protection given by law to the authors of literary, musical, artistic, and similar works. �Owner of copyright has rights to print, reprint, and copy the work; to sell or distribute copies; and to perform and record the work. �The cost of a copyright should be amortized over the period the copyright item is expected to produce revenue. 9/25/2021 16

Trademarks and Trade names �Trademarks (Mc. Donald’s Golden Arches) and trade names (Coca-Cola) are names, symbols, or other distinctive identities given to companies, products, and services. �Registered trademarks and trade names can be renewed for 20 -year periods. �The cash equivalent amount paid for the purchase of a trademark is capitalized. �Amount directly incurred in the development, protection, expansion, registration, or defense of a trademark should be capitalized. Such capitalized amounts should be amortized over the useful life of the trademark or 40 years, whichever is shorter. 9/25/2021 17

Franchises � Franchises often are granted by governmental units for the right to use public properties or to furnish public utility services, and by business entities for the right to use a particular designation and specified services. � The cost of obtaining a franchise often is high and usually requires an initial franchise fee be paid by the franchisee to the franchisor. � The initial cost of a franchise should be capitalized and then amortized as an expense. � Annual and current payments by the franchisee to the franchisor for services, such as assistance with promotional campaigns, accounting, and organizational matters, should be expensed by the franchisee as incurred because they do not create a measurable future benefit for the franchise. 9/25/2021 18

Leasehold �A lease is a right granted to one party by a second party to use property, plant, or equipment. � A business leases property from a second party under an operating lease and makes lease or rental prepayments. � The prepayment initially should be debited to an account often entitled “leasehold” or “prepaid rent expense. ” � The cost of this asset should be amortized over the period benefited (which is usually the lease term) by periodically debiting rent expense and crediting the asset account. � The cost of leasehold improvements (under an operating lease), such as modifications of the lease property, should be debited to a leasehold improvement account. � Leasehold improvements usually are classified as IA because the leased property does not belong to the lessee. � Leasehold improvements should 9/25/2021 be amortized as 19

IDENTIFIABLE BUT NOT EXCHANGEABLE IA �These IA can be separately identified but are not exchangeable. �These IA have two special characteristics: ◦ They are long-term prepayment of expenses, ◦ They do not confer any rights to the owner that could be sold to a second party. 9/25/2021 20

Deferred Charges �A deferred charge is an expenditure for a service that will contribute to the generation of future revenues; �It is reported as a long-term prepaid expense on the balance sheet. �Example: machinery rearrangement costs, long-term prepaid insurance premiums, and prepaid leasehold costs. �Deferred charges are amortized over the future periods during which they will contribute to the generation of revenues. (max. 40 years) 9/25/2021 21

Startup Costs �A development stage company, that is, a newly organized company, often incurs a wide range of startup costs before it has significant revenues against which such costs can be matched. �This cost will be capitalized and amortize when the company earn revenue. 9/25/2021 22

Organization Costs �Organization costs are expenditures incurred in organizing a business, such as expenditures for legal, accounting, promotional, and clerical activities, may be properly capitalized as organization costs. �This costs benefit the operations of future years. �Because the life of a business usually is considered indefinite, the length of the period receiving the benefits of these costs usually indeterminate. �This cost generally a not amortized up to the 40 -year rule because of their indeterminate 9/25/2021 23 characteristics.

Stock Issuance Costs �This costs include printing stock certificates and related items, professional fees, commissions paid for selling capital stock, and the costs of filing with state agencies and SEC. �This costs, as opposed to organizational costs, are accounted for either as an offset to the issuance price of the capital stock to which they relate or as a deferred charge, which is amortized to expense in conformity with the matching principle (usually on a conservative basis). 9/25/2021 24

DISPOSAL OF IA �When an IA is sold, exchanged, or otherwise disposed of, its unamortized cost (or cost net of accumulated amortization, if separately recorded) must be removed from the accounts and a gain or loss on disposal recorded. 9/25/2021 25

REPORTING INTANGIBLES �Noncurrent assets classified as intangibles are reported under such balance sheet heading as intangibles, deferred charges, and other assets. �There is variation in the manner in which companies report intangibles on their balance sheet. Often each major IA reported on the balance sheet is described in detail in the financial statement notes. 9/25/2021 26

ILLUSTRATIONS � ◦ Problem The patent was purchased from Grey Company on January 2, 2004 for $192, 000 , at which date the remaining legal life was 16 years. On January 2, 2006, Munn determined that the remaining useful life of the patent was only 8 years from the date of its acquisition. Solution On January 2, 2006, Munn determined that the patent has a shorter useful life than originally used in establishing an amortization schedule. This is a change in estimate and is accounted for prospectively. The next amortization is: � � Net patent balance at 1/2/2006: Remaining life (divided by 6) Amortization for 2006 = $28, 000 * $192, 000 – (2 x (192, 000 : 16) 9/25/2021 $168, 000* ÷ 6 27

ILLUSTRATIONS � Problem ◦ On January 3, 2006, in connection with the purchase of a trademark from Cody Corp. , the party entered into a noncompetition agreement. Munn paid Cody $800, 000, of which three quarters related to the trademark, and one quarter reflected Cody’s agreement not to compete for a period of five years in the line of business covered by the trademark. Munn considers the life of the trademark to be indefinite � Solution ◦ The cost of the trademark is three quarters of $800, 000, or $600, 000. Munn considers the trademark to have an indefinite life, but the maximum period over which intangibles can be amortized is 40 years. The trademark need not be amortized over 20 years even though this the legal life of a trademark. Trademark are renewable; hence, in reality they have an indefinite legal life. To determine the amortization for 2006, divide the cost of the trademark, $600, 000 by the maximum period allowed, 40 years. The amortization for 2006 is $15, 000. 9/25/2021 28

GOODWILL In 1988, Philip Morris acquired Kraft Inc. for a purchase price of approximately $12. 9 billion. The fair market value of Kraft’s net assets that were acquired totaled only $1. 3 billion. The difference, a staggering $11. 6 billion, cannot identified with any separable tangible or intangible assets. What does amount represent? Philip Morris recorded it as an asset and called it “goodwill. ” 9/25/2021 29

GOODWILL �Goodwill represents the value arising from the favorable characteristics of a firm that give rise to earnings beyond (in excess of) those expected from identifiable assets of the firm. �Goodwill was recorded when one firm acquired another. �Goodwill can exist without an acquisition; however, it is recorded only when one company is acquired by, or merged with, another. 9/25/2021 30

Conceptual Nature of Goodwill �Goodwill represents the expected value of a firm’s future above-normal financial performance. �Several factors that make the firm produces higher than average earnings: ◦ A superior management team. ◦ An outstanding sales organization ◦ Weakness in the management of one or more major competitors. ◦ Especially effective advertising. ◦ A secret manufacturing process. ◦ Exceptionally good labor relations. ◦ An outstanding credit rating. ◦ Etc. 9/25/2021 31

Measuring Goodwill after Purchase Price Is Determined �The value of goodwill cannot be directly computed because it is not separable or identifiable. The steps for measuring goodwill are: 1. The total value of a firm is estimated. 2. The value of identifiable assets, both tangible and intangible, and the current value of the liabilities of the firm are determined. 3. The difference between the two is considered the value of the goodwill. 9/25/2021 32

Example: Assume Hotel Company is considering the acquisition of Café Corp. Hotel Company obtains financial statements and other financial data on Café and estimates the fair market value of Café’s identifiable assets at $530, 000. 9/25/2021 33

Café Corp. Balance Sheet as of December 31, 2010, as Reported and Fair Market Values As Reported Assets: Cash Receivables Inventory Other current assets Plant & equipment (net) Other assets Total Assets 30, 000 90, 000 60, 000 33, 000 220, 000 85, 000 518, 000 ====== 9/25/2021 Fair Differe Market nce Value 30, 000 85, 000 (5, 000) 60, 000 30, 000 (3, 000) 235, 000 15, 000 90, 000 530, 000 ====== 34

Café Corp. Balance Sheet as of December 31, 2010, as Reported and Fair Market Values As Reporte d Liabilities: Short-term notes payable Account Payable Other current liabilities Long-term debt Stockholders’ Equity Total Equities Fair Market Value Differe nce 85, 000 45, 000 30, 000 250, 000 240, 000 (10, 000) 108, 000 130, 000 22, 000 518, 000 530, 000 ====== 9/25/2021 35

Assume that Hotel negotiates a purchase price with the owners to acquire Café as of December 31, 2010, for $202, 000. The amount of goodwill in this acquisition can now be computed. The purchase price is $202, 000, and the current market value of the identifiable net assets totals $130, 000; thus goodwill is the difference, or $72, 000. 9/25/2021 36

The entry Hotel Company would make to reflect the acquisition of Café is: Cash 30, 000 Receivables 85, 000 Inventory 60, 000 Other current assets 30, 000 Plant and Equipment 235, 000 Other Assets 90, 000 Goodwill 72, 000 Short-term N/P 85, 000 A/P 45, 000 Other CL 30, 000 Long-term debt 240, 000 Cash 202, 000 9/25/2021 37

Estimating Goodwill �One important method of estimating the value of a firm is to evaluate its earning power or excess earning approach. � 5 steps to estimate Goodwill 1. 2. 3. 4. 5. Estimate future earning Determine a normal rate of return Determine normal earnings Determine excess earnings Computation of goodwill 9/25/2021 38

� Past Estimate Future Earnings Step 1 earnings are a useful point of departure because they reflect neither optimistic nor pessimistic thinking about the future. � Suppose Café Corp. has the following five-year earnings history: Year Earnings 2005 26, 000 2006 25, 000 2007 30, 000 2008 32, 000 2009 37, 000 Five year total 150, 000 ====== The estimate future earnings is $30, 000 ($150, 000 / 5) 9/25/2021 39

Determine a Normal Rate of Return Step 2 �The rate of return on net assets varies across firms, although it is usually reasonably constant within industries. �For example, assume the industry rate of return for Café is 12%. 9/25/2021 40

Determine Normal Earnings Step 3 �Once the normal rate of return for the industry and the fair value of the net assets acquired are known, the expected, normal earnings for the firm can be established: ◦ Normal earnings = (rate of return) ( fair value of net assets) ◦ Normal earnings = (0. 12) (130, 000) ◦ Normal earnings = 15, 600 9/25/2021 41

Determine Excess Earnings Step 4 �The difference between the computed normal earnings for the firm and the estimate or forecast of future earnings represents the excess earnings of the firm. ◦ Excess Earnings = Estimated future earnings – Normal earnings = $30, 000 - $15, 600 = $14, 400 9/25/2021 42

Computation of Goodwill Step 5 �A number of values for goodwill could result depending on what discount rate is used to value the excess earnings stream and on how many periods the excess are assumed to continue in the future. ◦ Excess earnings are expected to continue indefinitely (in perpetuity). If the discount rate is 12%, therefore: Goodwill = Excess Earnings / Discount rate = $14, 400 / 0. 12 = $120, 000 9/25/2021 43

Computation of Goodwill Step 5 ◦ If the risk associated with the excess earnings is regarded as greater than that of the identifiable assets, a higher discount rate, say 20%, is appropriate for determining the goodwill. Goodwill = Excess earnings / Discount rate = $14, 400 / 0. 20 = $ 72, 000 9/25/2021 44

Computation of Goodwill Step 5 �Excess earnings may not be expected to continue indefinitely. �If a period of 10 years for Café Corporation’s excess earnings is assumed, present value annuity tables can be used to determine the value of goodwill. �Assume a discount rate is 12% Goodwill = (PVA, 12%, 10) (Excess earnings) = (5. 65022) ($14, 400) 9/25/2021 = $81, 363 45

Negative Goodwill �When the fair value of the net assets acquired is greater than the purchase price of the firm, the acquiring firm has made what might be called a bargain purchase. �The amount of goodwill, again computed as the difference between the purchase price and fair value of assets acquired, is negative. The amount is identified as badwill, or negative goodwill. 9/25/2021 46

Negative Goodwill �Assume Hotel Company purchase Café Corp. at price $97, 500. �The $32, 500 would be allocated proportionally to reduce the recorded values for plant, equipment, and other assets. �Two entries are required ◦ Record all assets and liabilities of Café at their value and sets up a goodwill account with a credit balance of $32, 500. ◦ The second entry writes down the plant and equipment and the other asset accounts proportionally. 9/25/2021 47

Negative Goodwill Cash Receivables Inventory Other current assets Plant and Equipment Other assets Goodwill Short-term N/P A/P Other Current L Long-term debt Cash 30, 000 85, 000 60, 000 30, 000 235, 000 90, 000 32, 500 85, 000 45, 000 30, 000 240, 000 97, 500 9/25/2021 48

Negative Goodwill � The computation of the proportional reduction of the two long-term asset account is: � Writedown of plant and equipment: 235, 000 ---------------- (32, 500) = 23, 500 235, 000 + 90, 000 � Writedown of other assets: 90, 000 --------------- (32, 500) = 9000 235, 000 + 90, 000 � The entry to write down these accounts is: Goodwill 32, 500 Plant and Equipment 23, 500 Other assets 9, 000 9/25/2021 49

Amortizing Goodwill �Write off the goodwill immediately to stockholders’ equity, because it is difficult to establish how long goodwill last. �Retain the goodwill indefinitely (do not amortize) unless a reduction in value occurs. �Amortize the goodwill over its useful life. Still other accountants argue that goodwill is gradually eroded or used up and that it should be amortized to expense over the periods benefited. These accountants believe amortization results in a better matching of revenues and costs. 9/25/2021 50

Research and Development Research and development costs include those costs of materials, equipment, facilities, personnel, purchased intangibles, contract services, and a reasonable allocation of indirect costs that are specifically related to R & D activities and that have no alternative future use. 9/25/2021 51 51

Research and Development 52 Examples § Research aimed at discovery of new § § knowledge. Search for applications of research findings. Search for possible product or process alternatives. Design, construction, and testing of preproduction prototypes. Design, construction, and operation of a pilot plant. 9/25/2021 52

Research and Development 53 Examples § Research aimed at discovery of new § § knowledge. Search for applications of research findings. Search for possible product or process alternatives. Design, construction, and testing of preproduction prototypes. Design, construction, and operation of a pilot plant. 9/25/2021 53

Computer Software Costs �The development of computer software to sell or lease to external parties involves significant costs. �All costs incurred to establish the technological feasibility of a computer software product to be marketed or leased are R&D costs and should be expensed when incurred. �Costs of producing product masters incurred subsequent to establishing technological feasibility shall be capitalized. This costs include coding and testing subsequent to establishing technological feasibility t 9/25/2021 54

Computer Software Costs �The development costs can begin to be capitalized is the point where technological feasibility is established. �Technological feasibility is established when all planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet its design specifications are completed. �Costs of production of the software from the masters and of documentation and training material, and the costs of physically packaging the materials for distribution are all production costs and inventoriable and transferred to cost of sales. 9/25/2021 55

Computer Software Development Expenditures R & D Costs (Expense) Deferred Costs (Intangible Assets) Softwar Technological e project feasibility initiated established Inventory Costs Software available for commercial production 9/25/2021 56 Software sold 56

Impairment of the Value of IA �During the period an IA or a deferred charge is used, a periodic assessment of the value of future benefit associated with the asset may show that its current book value exceeds its economic utility to the enterprise. In such cases, the unamortized cost should be written down, and a loss recognized. This reflects impairment of value. �The revised value should be amortized over the estimated remaining useful life, not to exceed 40 years from date of acquisition. �When a write-down occurs due to an impairment of value, disclosure is required in notes to the financial statements. 9/25/2021 57

Amortization and Impairment of Intangible Assets 58 Ethereal Company purchased a customer list for $30, 000 on January 1, 2005. It is expected to have economic value for four years. The expected residual value is zero. December 31, 2005 Amortization Expense 7, 500 Accumulated Amortization— Customer List 7, 500 9/25/2021 58

Amortization and Impairment of Intangible Assets 59 Ethereal Company purchased a customer list for $30, 000 on January 1, 2005. It is expected to have economic value for four years. The expected residual Decembervalue 31, is zero. 2005 Amortization Expense 7, 500 Accumulated Amortization— Customer List 7, 500 9/25/2021 59

Amortization and Impairment of Intangible Assets On December 31, 2006, before the amortization 60 entry is made, a test for impairment is made. The future cash flow of the list is expected to be $15, 000—which is less than the book value ($30, 000 – $7, 500) and the fair value of the list is $12, 000. December 31, 2006 Impairment Loss ($22, 500 – $12, 000)10, 500 Accumulated Amortization— Customer List 7, 500 Customer List ($30, 000 – $12, 000) 18, 000 9/25/2021 60

Impairment of Intangibles Not Subject to Amortization 61 SFAS No. 142 describe the following examples of intangibles with indefinite lives: Broadcast license often have a • Broadcast licenseperiod of ten years. renewal Because renewal is virtually automatic, such license are considered to have an indefinite life. 9/25/2021 61

Impairment of Intangibles Not Subject to Amortization 62 SFAS No. 142 describe the following examples of intangibles with indefinite lives: • Trademark A trademark right is granted for a limited time, but can be renewed almost routinely. As long as the trademark is useful, it has an indefinite life. 9/25/2021 62

Impairment of Intangibles Not Subject to Amortization 63 Impalable Company has a broadcast license that has no foreseeable end to its useful life. The license cost $60, 000 and it was estimated that the license generated cash flows of $7, 000 per year. Recent events have convinced management that the cash flow will be reduced. The weighted probability shows that the estimated fair value is $52, 000. 9/25/2021 63

Impairment of Intangibles Not Subject to Amortization 64 Because the estimated fair value is less than the book value, the intangible asset is impaired. Impairment Loss Broadcast license 8, 000 $60, 000 – $52, 000 9/25/2021 64

Impairment of Goodwill 65 Procedures in Testing Goodwill 1. Compute the fair value of each reporting unit to which goodwill has been assigned. 2. If the fair value of the reporting unit exceeds the net book value of the assets and liabilities of the reporting unit, the goodwill is assumed to not be impaired and no impairment is recognized. Continued 9/25/2021 65

Impairment of Goodwill 66 If the fair value of the reporting unit is less than the net book value of the assets and liabilities of the reporting unit, a new fair value of goodwill is computed. 4. If the implied amount of goodwill computed in (3) is less than the amount initially recorded, a goodwill impairment loss is recognized for the difference. 3. 9/25/2021 66

Asset with Significant Restoration Costs at Retirement 67 Bryan Beach Company purchases and erects an oil platform at a total cost of $750, 000. Oil Platform Cash 9/25/2021 750, 000 67

Asset with Significant Restoration Costs at Retirement 68 The oil platform will be in use for 10 years, at which time Bryan Beach is legally obligated to ensure that the platform is dismantled (at a cost of $100, 000). 9/25/2021 68

Asset with Significant Restoration Costs at Retirement 69 The oil platform will be in use for 10 years, at which time Bryan Beach is legally obligated to ensure that the platform is dismantled (at a cost of $100, 000). Oil Platform 46, 319 Asset Retirement Obligation 46, 319 FV = $100, 000; i = 8%; N = 10 years 9/25/2021 69

70 Capitalize or Expense? Expense Asset Research and Repairs Development Software Land Office Development Buildings Supplies Oil and Gas Used 9/25/2021 70 Exploration

Oil and Gas Exploration Costs 71 Under the full cost method, all exploratory costs are capitalized. The reasoning being that the cost of drilling dry wells is part of the cost of locating productive wells. 9/25/2021 71

Oil and Gas Exploration Costs 72 Under the successful efforts method, exploratory costs for dry wells are expensed, and only exploratory costs for successful wells are capitalized. wells. 9/25/2021 72

73 Depletion of Natural Resources Natural resources (wasting assets) are consumed as the physical units representing these resources are removed and sold. 9/25/2021 73

Depletion of Natural Resources Land containing mineral deposits is purchased at a cost of $5, 500, 000. The cost to restore the land to its original state after removal of the resources is estimated to be $200, 000 (then it can be sold for $450, 000). In 2005, 80, 000 tons of the estimated 1, 000 tons are removed. 9/25/2021 74 74

75 Depletion charge per ton = $5, 500, 000 – $250, 000 1, 000 tons = $5. 25 $450, 000 – $200, 000 Depletion for 2005 = $5. 25 x 80, 000 tons Depletion for 2005 = $420, 000 9/25/2021 75

76 Depletion The initial purchase: Mineral Deposits Cash 5, 500, 000 Depletion for 2005: Depletion Expense Accumulated Depletion (or Mineral Deposits) 420, 000 9/25/2021 76

The end 9/25/2021 77