Question

(Depletion Computations—Timber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2006 at a cost of \(1,400 per acre. At the time of purchase, the land without the timber was valued at \)400 per acre. In 2007, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of \(84,000. Every year, Stanislaw sprays to prevent disease at a cost of \)3,000 per year and spends \(7,000 to maintain the fire lanes and roads. During 2008, Stanislaw selectively logged and sold 700,000 board feet of timber of the estimated 3,500,000 board feet. In 2009, Stanislaw planted new seedlings to replace the trees cut at a cost of \)100,000.

Instructions

1. Determine the depreciation expense and the cost of timber sold related to depletion for 2008.
2. Stanislaw has not logged since 2008. If Stanislaw logged and sold 900,000 board feet of timber in 2019, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2019.

Short answer

Answer

1. Depreciation expense = $2,800
2. Cost of timber sold = $1,314,000

Step-by-step solution

Meaning of Depletion

Depletion is defined as a reduction in the quantity of a production factor due to the manufacturing process. Companies generate new products by combining current goods and services. When old items are turned into new products, it is termed a production process.

(a) Determining the depreciation expense and the cost of timber sold related to depletion for 2008. 

Determining the depreciation expense

$\begin{array}{rcl}\text{Depreciation}\text{expense}& =& \frac{\text{Cost}\text{of}\text{lanes}\text{and}\text{roads}}{\text{Useful}\text{life}}\\ & =& \frac{\$84,000}{30}\\ & =& \$2,800\end{array}$

Determining the cost of timber sold

$\begin{array}{rcl}\text{Cost}\text{of}\text{timber}\text{sold}& =& \text{Cost}\text{per}\text{acres}-\text{Valuation}\text{of}\text{the}\text{land}\\ & =& \$1,400-\$400\\ & =& \$1,000\text{per}\text{acres}\\ & & \end{array}$

$\begin{array}{rcl}\text{Value}\text{of}\text{timber}& =& \text{Cost}\text{of}\text{timber}\times \text{Total} \text{timber}\text{land}\text{acquired}\\ & =& \$1,000\times 9,000\\ & =& \$9,000,000\end{array}$

$\begin{array}{rcl}\text{Cost} \text{of}\text{timber}\text{sold}& =& \frac{\text{Value} \text{of}\text{timber}}{\text{Estimated}\text{board}\text{feet}}\times \text{Quantity}\text{of}\text{timber}\text{sold}\\ & =& \frac{\$9,000,000}{3,500,000}\times 700,000\\ & =& \$1,800,000\end{array}$

(b) Determining the cost of timber sold

Calculating the cost of timber sold related to depletion for 2019
Timber available ($9,000,000 $1,800,000)	$7,200,000
Add: Cutting costs	$100,000
	$7,300,000

$\begin{array}{rcl}\text{Cost} \text{of}\text{timber}\text{sold}& =& \frac{\text{Value} \text{of}\text{timber}}{\text{Estimated}\text{board}\text{feet}}\times \text{Quantity}\text{of}\text{timber}\text{sold}\\ & =& \frac{\$7,300,000}{5,000,000}\times 900,000\\ & =& \$1,314,000\end{array}$