Question

At the beginning of 2018, Terra Lumber Company purchased a timber tract from Boise Cantor for $4,230,000. After the timber is cleared, the land will have a residual value of $690,000. Roads to enable logging operations were constructed and completed on March 30, 2018. The cost of the roads, which have no residual value and no alternative use after the tract is cleared, was $354,000. During 2018, Terra logged 590,000 of the estimated 5.9 million board feet of timber.

Calculate the 2018 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.)

Answer 1

Solution:

Cost of timer tract = $4,230,000

Residual value of land after timber is cleare = $690,000

Total estimated board feet of timber to be logged = 5,900,000 feet

Total board feet of timber logged during 2018 = 590000 feet

Depletion of the timber tract for 2018 = (Cost - Residual value) / Total estimated of timber to be logged * Timber logged in current year

= ($4,230,000 - $690,000) * 590000 / 5,900,000 = $354,000

Deprciation of logging roads for 2018 = ($354,000 - $0) * 590000 / 5900000 = $35,400