Definition and Explanation:
Depletion method is
basically an accounting for natural resources rather
that accounting for depreciation. In the case of
wasting assets such as mines and quarries, which
have to be replaced, depreciation is usually
provided for on the depletion unit basis, which
means that such a sum is provided each year as
represents the expired capital outlay on the basis
of output compared with the estimated total contents
of the mine etc. Thus if a stone quarry estimated to
contain 100,000 tonnes of stone, is acquired for
$5,000, the amount of depreciation to be provided
will be 5 cents per tonnes of stone raised.
Example:
The SM limited leased a manganese
ore mine on June 30th 2002 for a sum of $500,000. It
is estimated that total quantity of ore in the mine
is 100,000 tonnes. The annual output is as follows:
| Year |
Tonnes |
| 2002 |
5,000 |
| 2003 |
20,000 |
| 2004 |
16,000 |
| 2005 |
21,000 |
|
Required: Using the
depletion method of depreciation,
show the mine account for the above 4 years.
Solution:
The depreciation will be @ $5
per tonne raised each year:
|
$500,000 / 100,000
tonnes
= $5.00 |
Mine Account
|
2002 |
|
$ |
2002 |
|
$ |
| June 30 |
Bank |
500,000 |
Dec. 31 |
Depreciation |
25,000 |
| |
|
|
|
Balance c/d |
475,000 |
| |
|
|
|
|
|
| |
|
500,000 |
|
|
500,000 |
| |
|
|
|
|
|
|
2003 |
|
|
2003 |
|
|
|
Jan. 1 |
Balance b/d |
475,000 |
Dec. 31 |
Depreciation |
100,000 |
| |
|
|
|
Balance c/d |
375,000 |
| |
|
|
|
|
|
| |
|
475,000 |
|
|
475,000 |
| |
|
|
|
|
|
|
2004 |
|
|
2004 |
|
|
| Jan. 1 |
Balance b/d |
375,000 |
Dec. 31 |
Depreciation |
80,000 |
| |
|
|
|
Balance c/d |
295,000 |
| |
|
|
|
|
|
| |
|
375,000 |
|
|
375,000 |
| |
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
| Jan. 1 |
Balance b/d |
295,000 |
Dec. 31 |
Depreciation |
105,000 |
| |
|
|
|
Balance c/d |
190,000 |
| |
|
|
|
|
|
|
2006 |
Balance b/d |
190,000 |
|
|
|
| |
|
|
|
|
|
|
