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Accounting Allah shmoop depletion allowance All right Isn't this something

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from a Gatorade commercial And maybe we'll depletion Allowance exists

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because well originally there was an asset Think our four

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hundred acre parcel of land with permits to mine for

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gold or lucky charms after which time it will have

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been depleted The projective four million tons of lucky charms

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we expected to mind from the ten thousand acres we

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bought from that really short guy with the Irish accent

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He kept laughing and trying to fist fight with us

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all the time on originally had a whole lot of

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lucky charms But we mind them and we depleted them

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Five years after straightening the land for chewy rainbow nuggets

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of goodness we went to sell that land to the

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American Dental Association had been behind the whole thing The

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land is clearly worth less after being mined and parenthetically

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we're always dealing with that one dentist who never recommends

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Colgate Well why was it worth less after being mind

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Well because we depleted it of its key value or

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asset or natural ish resource And so we must allow

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for that loss when we go to sell the property

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right We've covered the depreciation of capitalized factory equipment already

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given smelting factory cost one hundred million box then slowly

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died Such that it was only worth twenty million dollars

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a decade later where it was sold at auction along

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with Pez dispensers old stuff donkeys and Thorne Hot wheels

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track you know been there done that So that's a

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piece of physical equipment So how do we then apply

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the concept of depreciation to land that we are mining

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in a situation where we really have no idea how

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much that land will be worth by the time we

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finished you know abusing it The answer We guess Let's

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say we've paid a million dollars for a subset of

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the total of four thousand acres and we've bought a

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thousand acres of land that our leper cons have identified

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as highly likely to carry the nuggets for lucky charms

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Cereal like this slice of land is the prime asset

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and should have very high yield charm's per acre Well

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General Mills that used to be Colonel Males and got

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promoted has agreed to buy from us the Nuggets for

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one hundred bucks a ton and we think we can

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mind many many many tons Before we are done a

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ton might cost us sixty bucks to mind leaving forty

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bucks to cover the million dollars we've paid for the

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land Ignoring capital cost for now that is we're making

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the bet that at contribution to us of forty dollars

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a ton weaken mine at least one million over forty

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or twenty five thousand tons of charms from this land

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in the time allocated One key difference in this set

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of calculations revolves around depletion Allowance versus appreciation Why or

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how is this different Well in the case of depletion

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allowance since we own this land forever time really doesn't

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matter in the same way that it did for the

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decline and fall of Betsy the tractor smelting factory You

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know we love you old girl That is a kn

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mind Land leaves the nuggets in the ground perpetually They

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don't decay in the way a tractor factory does So

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the depletion of land can take five years or twenty

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years or fifty years The timing just doesn't matter as

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much So we paid a million dollars for this land

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And obviously we expect to get back a lot more

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than a million dollars or we wouldn't have bought it

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in the first place In fact we think that there's

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likely three million dollars worth of lucky charms buried not

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too deep in the land So it's easy to obtain

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Well the year goes by and we've taken out eight

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hundred thousand dollars worth of lucky charms It was an

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easy hall because the rainbow guided our way But we

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know now that what land is where less than it

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was originally In fact to get that eight hundred thousand

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dollars worth of lucky charms we had to dig twenty

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feet deep across the entire thousand acre wood so we

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don't know what the land is now worth But we

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know it's worth less than it was a year ago

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before we did any of our mining to get to

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the right depletion allowance number Then we simply make up

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a depletion amount that has hit the land using our

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best guest as to what is left like we think

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that we've used up about half the value of the

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land now and that the remaining eight thousand tonnes of

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charms would take us in and three or four years

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to get two If we decide to mind him that

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is it might make sense for us to simply sell

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the land for salvage value Having already gotten back almost

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all of our money in the first year on our

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books we would guess that land now is worth half

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of what we paid for it Half a million bucks

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note that there are costs in the mining of charms

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as well and yes now the leper cons have unionize

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So you know So we simply marked down the value

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of the million dollars that we originally held land's value

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out to now be depleted to be half or half

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of its resource is now currently worth five hundred grand 00:04:32.945 --> [endTime] So that's it Depletion allowance It's a magically delicious

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