 to the session in which we would look at a depletion example that deals with natural resources. Now depletion is the same thing as depreciation except we are dealing with natural resources and it's the same concept as amortization expense when dealing with intangible asset. Simply put, depletion is taking the cost of the natural resource and expense in that cost. Now for natural resources, oftentimes we do have some sort of an output that we can measure our depletion. So this is what we're going to be looking in this example to do. Compute that basically the cost per unit, the depletion cost and once we know the depletion cost we know the amount of inventory we have from the natural resource. Let's go ahead and get started. At a mining company purchase a land on January the first 20x1 at a cost of 1.2 million. Now since you purchased the land that's going to be part of your base. Think of property, plant and equipment when you buy it that's your cost. Now you might have other costs but that's the main cost purchase the land. Adam estimated that a total of 80,000 tons of mineral was available for mining. Well this is the output. This is the total output 80,000 tons of mineral. Once the site is depleted Adam is required to restore the land to its previous state due to environmental protection laws. Well we're going to have to pay something basically maybe plant the trees, build the fence, make it look good. The present value of the cost to restore the land is 65,000 and notice here I said present value because you have to pay this money down the road. Well that's fine but you know it's going to cost you 65,000 today so you have to put away 65,000 that's your present cost so use the time value of money and don't worry how we come up with this just it's given to you. Sometime they may tell you you need to pay this amount six years from now and they'll give you the amount six years from now as 100,000 then they give you the present value factor and you have to find the present value. For here I just told you the present value is 65,000. Also Adam believes he can sell the land for 100,000 once the minerals are extracted. Well also I'm giving you the present value now this amount could be more into the future but the present value today based on the present value money is 100,000. An additional 400,000 of developmental cost is required before the extraction commence so simply put Adam will need to incur additional costs to get the site ready. In the first year Adam extracted 25,000 tons of which he sold 20,000 so the first question in this example is compute the per unit material cost simply put what is our cost per one ton. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions as well as exercises. Go ahead start your free trial today no obligation no credit card required. Now how do we compute this first we have to figure out how much did we invest what's our cost and based on our cost we are going to divide by the number of unit we we can extract 80,000 so what is our cost what our cost is 1.2 million then we're gonna have to pay or we are responsible for 65,000 for the environmental cost then we are going to get back a hundred thousand from this land and we incurred an additional 400,000 of developmental cost so all in all our cost will be 1,565,000 this is our total cost now what are we going to do we're going to take total cost and divide it by the output of 80,000 then we know now our cost per ton per ton is $19.56 now we know every ton we extract the cost of that ton is that much now how much are we going to sell it for we might sell it for $35 we might sell it for $40 I don't know how much the mineral mineral goes for but this is what we're doing now the second question is compute the inventory well inventory is what you have left how many units that I have left how many tons I if I extracted 25 sold 20 I must have left 5,000 therefore my total inventory is 5,000 times 19.56 which is 97,000 $800 what is my cost of goods sold cost of goods sold is how many units I actually sold well how many units I sold it's 20,000 unit times 19.56 now here's what I want to tell you it's which is 391,200 in some textbook or for some natural resources what's going to happen is this natural resources are a little bit different than other assets why because they have a readily available market what does that mean let's assume you are extracting oil each barrel of oil there's a more active market price I don't know what's the barrel of oil today is it's around 90s or $100 so what what companies can do is if they extracted 25,000 barrels that day they can multiply it by $90 and consider that old cost of goods sold why because it's considered sold I'm sorry not by now if the if the price is $90 it means there is a market so let's assume it costs them you know $60 so they can take the 25,000 times the $60 in cost of goods sold everything so in other words they extracted 25,000 barrels they only sold 20 they can still expense the whole 25,000 why because the oil has an actively mark active market they can sell it immediately therefore if they want to expense it they are allowed to expense it because they can easily sell it immediately as well there's an active market for that just FYI because it's a kind of special accounting issues just in case in your textbook they expense the whole thing the 25,000 and they say there is zero inventory because we expense the whole thing that's also acceptable it's a special type of accounting you don't have to worry about this just in case you saw it I want I want to make sure you're aware of it and the only reason you can do that is because there's an active market you have oils you can sell it and there's an active market therefore whatever you produce you can consider it immediately cost of goods sold because you could consider it sold immediately based on a contract what should you do now go to farhat lectures look at additional mcqs through false that's going to help you understand the pollution expense good luck study hard and of course stay safe