The Peace River Drilling Company (PRD) is a private company, and has just completed its first year of operations. The company drills oil and gas wells. Because rigs are easier to move across dry or frozen ground, most of the drilling done by PRD occurs in the summer and winter seasons. PRD has a part-time accountant who has been responsible for recording most of the companys transactions and he is about to prepare the draft financial statements and needs some advice from you.

The company has four major types of tangible assets: land, buildings, drilling rigs, and furniture. PRD has also just developed a new drill bit and has obtained a patent for it because of its unique design. The company has entered into a contract with a drill bit manufacturer that gives the manufacturer the right to use the unique design when producing its products in exchange for a royalty from the sale of these drill bits. The agreement expires in five years. The company plans to do a public issue of shares sometime in the next three years.

1. The accountant would like to know if intangible assets have to be amortized. If this is required, explain why, and describe the method that should be used and length of time over which the patent should be amortized.

2. The accountant would like to know if any of the companys assets should be classified as natural resources. Why or why not?

3. Because the drilling industry is in a mild recession, the company is not planning on buying any rigs or other major assets next year. Industry experts expect most drilling companies to maintain a level volume of sales revenue next year. What do you think will happen to the companys asset turnover ratio next year? How would you interpret this change in the ratio?