Question
In: Accounting
The method of depletion used to allocate the cost of natural resources to future periods is...
The method of depletion used to allocate the cost of natural resources to future periods is most similar to the straight line depreciation method
True or false
Solutions
Expert Solution
Ans: False
Explanation: Depreciation per year remains same in all years under Straight Line Depreciation Method. But under depletion method depreciation for the year depends upon the natural resource extracted i.e. it changes every year.The following is an example.
| Calculation of Depletion expense for 2018:- | ||||||
| Depletion Expense per barrel | = | Cost of oil reserves | ||||
| Total capacity in barrels of oil | ||||||
| Depletion Expense per barrel | = | $252,000,000 | ||||
| 140000000 | ||||||
| Depletion Expense per barrel | = | $ 1.80 | ||||
| No of Barrels removed during 2018 | = | 30,000,000 | ||||
| Depletion Expense | = | $1.80 * 30,000,000 | ||||
| = | $ 54,000,000 | |||||
| . | Straight Line Depreciation Method :- | |||||
| Depreciation Expense | = | Depreciable Amount | ||||
| Useful Life | ||||||
| Depreciable Amount | = | Cost - Salvage value | ||||
| Cost of oil reserves | = | $252,000,000 | ||||
| Salvage value (residual value) | = | $0 | ||||
| Remaining Useful life | = | 5 | years | |||
| Depreciable Amount | = | $252,000,000 | - | $0 | ||
| = | $252,000,000 | |||||
| Depreciation Expense | = | $252,000,000 | ||||
| 30 years | ||||||
| = | $50,400,000.00 | per year | ||||
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