Question

Question: Is the declining-balance method an acceptable way to compute depletion of natural resources? Explain.

Short answer

Yes, the declining-balance method an acceptable way to compute depletion of natural resources.

Step-by-step solution

Natural resources

Natural resources are assets that are physically consumed when used. Examples are standing timber, mineral deposits, and oil and gas fields. Because they are consumed when used, they are often called wasting assets. These assets represent soon-to-be inventories of raw materials that will be converted into one or more products by cutting, mining, or pumping.

Depletion of natural resources

Depletion is the process of allocating the cost of a natural resource to the period when it is consumed. Natural resources are reported on the balance sheet at cost less accumulated depletion. The depletion expense per period is usually based on units extracted from cutting, mining, or pumping. This is similar to units-of-production depreciation.

Formula to calculate depletion cost