In short
Depletion allocates the cost of natural resources, such as oil, gas, minerals or timber, to the units extracted, usually by the units-of-production method.
Key takeaways
- Depletion rate = (cost − residual value, plus any restoration costs) ÷ estimated recoverable units.
- Depletion on resources extracted but not yet sold sits in inventory, not expense.
- Changes in estimated reserves are changes in estimate, applied prospectively.
Example
A mine costing $5,000,000 with no residual value and 1,000,000 estimated tons: depletion is $5 a ton; extracting 120,000 tons adds $600,000 to inventory.
Where it's tested
FAR: Property, Plant & Equipment — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under US GAAP, a long-lived asset held for use is tested for impairment. The carrying value is $500,000, undiscounted future net cash flows are $520,000, and fair value is $460,000. What impairment loss, if any, should be recognized?