Page 457 - Accounting Principles (A Business Perspective)

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Exchanges Having Commercial Exchanges NOT Having Commercial
Substance Substance
Recognize Gains? Yes No
Recognize Losses? Yes No
Record Fair market value of asset Book value of old asset plus
New Asset At:
received (new asset) or fair cash paid
market value of asset given up
(old asset), whichever is more
clearly evident
Exhibit 93: Summary of rules for recording exchanges of plant assets
Companies incur removal costs when dismantling and removing old plant assets. They deduct these costs from

salvage proceeds to determine the asset's net salvage value. (The removal costs could be greater than the salvage
proceeds.) Accountants associate removal costs with the old asset, not the new asset acquired as a replacement.
The next section discusses natural resources. Note the underlying accounting principle of matching the expenses
with the revenues earned in that same accounting period.
Natural resources

Resources supplied by nature, such as ore deposits, mineral deposits, oil reserves, gas deposits, and timber
stands, are natural resources or wasting assets. Natural resources represent inventories of raw materials that
can be consumed (exhausted) through extraction or removal from their natural setting (e.g. removing oil from the
ground).
On the balance sheet, we classify natural resources as a separate group among noncurrent assets under headings
such as "Timber stands" and "Oil reserves". Typically, we record natural resources at their cost of acquisition plus

exploration and development costs; on the balance sheet, we report them at total cost less accumulated depletion.
(Accumulated depletion is similar to the accumulated depreciation used for plant assets.) When analyzing the
financial condition of companies owning natural resources, exercise caution because the historical costs reported
for the natural resources may be only a small fraction of their current value.

An accounting perspective:

Business insight

Kerr-McGee Corporation is a global energy and chemical company engaged in oil and gas
exploration and production, and the production and marketing of titanium dioxide pigment. In
notes to its financial statements, Kerr-McGee states that the company's geologists and engineers in
accordance with the Securities and Exchange Commission definitions have prepared estimates of
proved reserves. These estimates include reserves that may be obtained in the future by improved

recovery methods now in operation or for which successful testing has been exhibited.

Depletion is the exhaustion that results from the physical removal of a part of a natural resource. In each
accounting period, the depletion recognized is an estimate of the cost of the natural resource that was removed
from its natural setting during the period. To record depletion, debit a Depletion account and credit an
Accumulated Depletion account, which is a contra account to the natural resource asset account.

Accounting Principles: A Business Perspective 458 A Global Text