How to Properly Account for Natural Resources Exploration and Development by Flannery Company

Capitalization of Costs for Natural Resources

Flannery Company engages in the exploration and development of various natural resources, including a silver mine and a timber tract. In accounting for these assets, the company must capitalize the costs associated with their acquisition and preparation for use.

Silver Mine: The silver mine was purchased for $1,500,000 and is estimated to contain 100,000 tons of silver ore. Flannery Company capitalizes the silver mine at $15 per ton of ore. This allocation reflects the cost incurred in acquiring and exploring the mine per ton of estimated silver ore.

Timber Tract: The timber tract was acquired for $1,700,000 and is estimated to yield 1,000,000 board feet of lumber, with a residual land value of $100,000. Flannery Company capitalizes the timber tract at $1.60 per board foot, excluding the residual land value separately.

By appropriately allocating costs based on the estimated quantities of silver ore and board feet of lumber, Flannery Company ensures accurate representation of the value of these natural resources on its balance sheet.