Question

At the beginning of 2021, Terra Lumber Company purchased a timber tract from Boise Cantor for $3,160,000. After the timber is cleared, the land will have a residual value of $780,000. Roads to enable logging operations were constructed and completed on March 30, 2021. The cost of the roads, which have no residual value and no alternative use after the tract is cleared, was $238,000. During 2021, Terra logged 680,000 of the estimated 6.8 million board feet of timber.

Required:
Calculate the 2021 depletion of the timber tract and depreciation of the logging roads assuming the units-of-production method is used for both assets. (Do not round intermediate calculations. Enter values in whole dollars.)

Answer 1

Answer:

i	Depletion of the timber tract	$238,000
ii	Depreciation of the logging roads	$23,800

Calculations:

i.Depletion of the timber tract:

Depletion cost per unit = (Cost of the asset - Residual value) ÷ Estimated number of units

= ($3,160,000 - $780,000) ÷ 6,800,000 board feet

= $2,380,000/6,800,000

= $0.35

Depletion expense for 2021 = Depletion cost per unit x Number of units extracted and sold

= $0.35 x 680,000

= $238,000

ii.Depreciation of the logging roads:

Depletion cost per unit = (Cost of the asset - Residual value) ÷ Estimated number of units

=($238,000-$0) ÷ 6,800,000

=$0.035

Depletion expense for 2021 = Depletion cost per unit x Number of units extracted and sold

=$0.035 x 680,000

=$23,800