USA Gravel Mine Experts


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We picked up a new client who owns a paving company that also mines it's own gravel. Business and Gravel mine are located on parents property, so the mine was not purchased or rent is not being paid to parents.

What are the proper ways to account for the gravel mine on the Balance Sheet? The questions I have are as follows:

- For the depletion entry I record the fair value of the land on the books: Asset (Gravel Mine), then credit owners equity? The depletion rate is calculated by determining the gravel reserves divided by the amount booked in the asset account. For example if land is worth $500k and they have reserves of 250k Tons The depletion factor would be $2 per ton. The depletion entry each year would be tons of gravel used times the $2 and booked to Depletion Expense and Accumulated Depletion. Is this correct?

- When the gravel is mined does this get booked as inventory? If so what how to value? The reason I'm unsure about this is because nothing is being paid for the gravel I see it as potential overstating COGS

Thanks!
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J

John Baker

Basically, the costs associated with acquiring and stocking this gravel (if your client does stock it) are the coast of equipment usage, the overhead associated with equipment usage/ stocking/storing the gravel. I'm deliberately not getting into the construction/on worksite issues.
I had an experience similar to yours, with a landscaper who was allowed to use discarded dirt/top soil. from a construction site. This top soil was trash to someone else, but valuable to his landscaping company.
Since there was no direct impact, cash wise for the top soil, the only costs associated with the retrieval and use, was the direct costs for the machinery, direct labor costs of drivers and misc labors, storage bins on his property, and allocated overhead proportionally distributed reasonably base activity based.
When he sold the top soil directly, the costs described above were inventory and thus per ton/half ton/ packaged -bag sales, thus charge to COGS. On the job site, the per ton costs were use as just described.
So, knowing nothing else of your specific client, I would suggest keeping things simple by using acquisition costs that are known. I would also suggest staying away from the creative stuff for the sake of ideas on the fringe.
 
J

John Baker

I don't understand "depletion" in this case. Perhaps in that business, there are industry norms that swing that way - however, depletion would be (if I understand depletion) in this case, taking value away from something that was never paid for in the beginning. The entire land - as it sits, belongs to someone else, does not influence your client's books as his asset, does not have a legal mutual usage agreement, nor has the gravel mine been surveyed geologically with an estimate of "in ground volume", or certificate as such.
On the other hand, if your client has used this access, as leverage for credit, borrowing, or some other business, that's a matter that may be material in amount as disclosure language on a financial statement. I say may, because access and usage, may now be a strong influence on the stability of this business. And although a convenience, others may view this environment as subject to the whims of a relationships and thus a potential disruption in the credit worthiness of the client. If there are other sources for the same materials,
at a greater expense, that's worth considering if your issuing financials to lending institutions, creditors and the like, on your firm's stationary.
Did I address your concerns?
 
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