Depletion Expense Example. CPA Exam

How do you compute depletion expense for natural resources on the CPA exam? This FAR-focused example explains depletion, the process of allocating the cost of a natural resource such as a mine over the units extracted, similar to depreciation for plant assets. Professor Farhat helps accounting students and CPA, CMA, and EA candidates build the depletion cost base, calculate the per-unit rate, and split the cost between inventory and cost of goods sold. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction 3:29 — Building the total depletion cost base 4:06 — Computing the per-unit depletion cost 4:32 — Allocating cost to ending inventory 4:56 — Allocating cost to cost of goods sold 5:14 — Special consideration for resources with active markets such as oil Frequently Asked Questions: What is depletion expense? Depletion is the systematic allocation of the cost of a natural resource, such as a mine, oil field, or timber tract, over the units of the resource that are extracted. It is the natural-resource counterpart to depreciation for plant assets and amortization for intangibles. What costs are included in the depletion base? The depletion base generally includes the purchase price of the resource, development costs to prepare it for extraction, and estimated restoration or environmental costs, reduced by any residual or salvage value of the land after extraction is complete. How is the per-unit depletion rate calculated? You divide the total depletion base by the estimated total number of units the resource is expected to yield, such as tons or barrels. The result is a cost per unit that is then multiplied by the number of units extracted during the period. How is depletion split between inventory and cost of goods sold? The per-unit rate is applied to units extracted. Units extracted but not yet sold remain capitalized in inventory, while units that have been sold are moved to cost of goods sold. Only the sold portion reduces income in the current period. Why is accounting for some resources like oil treated differently? For resources with active, liquid markets such as oil, certain standards allow a company to treat the entire amount extracted as cost of goods sold immediately. This is because the product can effectively be considered sold the moment it is produced and enters the market. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #depletion #naturalresources #intermediateaccounting #costofgoodssold #ProfessorFarhat