Natural resources are defined as assets that are formed naturally over time. Some examples of natural resources include timber, minerals, and oil. Like other long-term assets, natural resources are reported on the balance sheet at book value, and all costs associated with getting the asset ready for its intended purpose or use are included in the cost of the asset.
Depletion is the process of transferring the cost of a natural resource to an expense as it is consumed. As natural resources are consumed, they are considered to be depleted. Depletion, like depreciation, allows for the transfer of the cost of the asset to an expense account over time. In order to determine the rate of depletion, the cost of the resource is divided by the estimated total units of the resource available. Then, to determine the current period depletion expense, the depletion rate is multiplied by the quantity extracted. This approach is similar to the units-of-production method. To record the depletion expense for the period, debit the Depletion Expense account and credit Accumulated Depletion, a contra asset account.
To illustrate, Cassie Enterprises purchased mining rights at $600,000.
Cassie Enterprises Mining Rights
|Cost of mineral deposit||$600,000|
|Estimated total units of resource||1,500,000 tons|
|Tons mined during the year||80,000 tons|
The annual depletion expense of $32,000 is computed using a formula.Step 1:
Depletion Expense Journal Entry
|Dec 31||Depletion Expense||$32,000|
|To record depletion of mineral deposit|
An intangible asset is an asset that is nonphysical and provides business entities with long-term rights, privileges, or competitive advantages. Characterized by the lack of physical substance, intangible assets are recorded at cost. The most common intangible assets are patents, copyrights, trademarks, and goodwill. Intangible assets can be categorized by their useful life: limited or unlimited. Intangible assets with limited life should be amortized over its useful life. Intangible assets with an indefinite life, such as goodwill, should not be amortized. Very similar to depreciation, amortization is the process of spreading or allocating a cost or payment over a period of time. Amortizing an intangible asset spreads the asset costs over the life of the asset. Unlike depreciation, the straight-line method is, with few exceptions, the only method of amortization used for intangibles. Amortization can be computed by dividing the intangible assets' costs by the estimated useful life.
Defined as an exclusive right granted to use a process or to produce or sell an item, a patent has a maximum useful life of 20 years. To properly account for patents, the patent account should be debited at acquisition for the cost to acquire the rights. Because of the fact that a patent has a limited life, it should be amortized over its estimated useful life not to exceed 20 years. The amortization entry is a debit to Amortization Expense-Patents and a credit to Accumulated Amortization-Patents.
Hollywood Movies purchases a patent for $35,000. To record the patent, Hollywood Movies will make a journal entry.
Patent Purchase Journal Entry
|To record patent purchase|
Patent Amortization Journal Entry
|June 30||Amortization Expense Patents||$1,750|
|Accumulated Amortization Patents||$1,750|
|To record patent amortization|
A copyright provides exclusive publishing rights for performing arts, literary works, visual arts, digital content, photographs, and motion pictures. A copyright has a useful life that extends 70 years beyond the death of said author of the musical, literary, or artistic work. The United States Copyright Office provides copyrights. Copyrights are amortized over the life of the intangible asset. To determine the amortization for a copyright, divide the cost of the copyright by the estimated useful life.
Hollywood Movies purchases a copyright for $140,000. It makes a journal entry to record the purchase.
Copyright Purchase Entry
|To record copyright purchase|
Copyright Amortization Entry
|June 30||Amortization Expense Copyrights||$5,600|
|Accumulated Amortization Copyrights||$5,600|
|To record copyright amortization|
A trademark is a unique symbol, name, phrase, or jingle used to identify a business entity, product, or service. Some examples of trademarks include the "golden arches" representing McDonald's, "swoosh" for Nike, and "the siren" for Starbucks. Trademark ownership is established by registering with the United States Patent Office. Trademark development and enhancement costs are charged to an expense account when incurred. However, if a trademark is purchased, the cost of the asset is debited to trademarks and should be amortized over the life of the intangible asset. Trademarks can be renewed indefinitely. The cost associated with the renewal is not amortized.
Tom's Burgers purchases a trademark for $150,000 for cash. It makes a journal entry to record the purchase.
Trademark Purchase Journal Entry
|To record trademark purchase|
Trademark Amortization Journal Entry
|June 30||Amortization Expense Trademarks||$5,000|
|Accumulated Amortization Trademarks||$5,000|
|To record trademark amortization|