Question

Question: (Natural Resources—Timber) Bronson Paper Products purchased 10,000 acres of forested timberland in March 2017. The company paid \(1,700 per acre for this land, which was above the \)800 per acre most farmers were paying for cleared land. During April, May, June, and July 2017, Bronson cut enough timber to build roads using moveable equipment purchased on April 1, 2017. The cost of the roads was \(250,000, and the cost of the equipment was \)225,000; this equipment was expected to have a \(9,000 salvage value and would be used for the next 15 years. Bronson selected the straight-line method of depreciation for the moveable equipment. Bronson began actively harvesting timber in August and by December had harvested and sold 540,000 board feet of timber of the estimated 6,750,000 board feet available for cutting.

In March 2018, Bronson planted new seedlings in the area harvested during the winter. Cost of planting these seedlings was \)120,000. In addition, Bronson spent \(8,000 in road maintenance and \)6,000 for pest spraying during calendar-year 2018. The road maintenance and spraying are annual costs. During 2018, Bronson harvested and sold 774,000 board feet of timber of the estimated 6,450,000 board feet available for cutting.

In March 2019, Bronson again planted new seedlings at a cost of \(150,000, and also spent \)15,000 on road maintenance and pest spraying. During 2019, the company harvested and sold 650,000 board feet of timber of the estimated 6,500,000 board feet available for cutting.

Instructions

Compute the amount of depreciation and depletion expense for each of the 3 years (2017, 2018, and 2019). Assume that the roads are usable only for logging and therefore are included in the depletion base.

Short answer

Answer

1. 2017: Depletion = $740,000, and Depreciation = $10,800
2. 2018: Depletion = $1,035,000, and Depreciation = $14,400
3. 2019: Depletion = $774,440, and Depreciation = $14,400

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 can generate new products by combining current goods and services. When old items are turned into new products, it is termed a production process.

(a) Computing depletion and depreciation for 2017

Computation of depletion base for 2017
Timber
Cost per acre $1,700
Add: Land cost 800
Timber cost $ 900	$9,000,000
Road cost	250,000
Total depletion base	$9,250,000

Working Notes:

Calculation of total cost of the timber

$$\begin{gathered} \text{Total}\text{cost}\text{of}\text{timber}=\text{Total}\text{purchased}\text{land}\times \text{Cost} \text{of}\text{timber} \\ =10,000\times \$900 \\ =\$9,000,000 \end{gathered}$$

Calculation of depletion for 2017

$$\begin{gathered} \text{Depletion}=\text{Depletion} \text{base}\times \frac{\text{Harvested} \text{timber}}{\text{Estimated}\text{timber}} \\ =\$9,250,000\times \frac{540,000}{6,750,000} \\ =\$740,000 \end{gathered}$$

Calculation of depreciable base

Depreciation of removable equipment
Cost	$ 225,000
Salvage value	(9,000)
Depreciable base	$ 216,000

Calculating annual depreciation using the straight-line method

$$\begin{gathered} \text{Annual}\text{depreciation}=\frac{\text{Depreciation} \text{base}}{\text{Useful}\text{life}} \\ =\frac{\$216,000}{15} \\ =\$14,400 \end{gathered}$$

Calculation of depreciation expense for 2017

$$\begin{gathered} \text{Depreciation}=\text{Annual} \text{depreciation}\times \frac{\text{Number}\text{in} \text{months}}{\text{Months}\text{in}\text{a}\text{year}} \\ =\$14,400\times \frac{9}{12} \\ =\$10,800 \end{gathered}$$

(b) Computing depletion and depreciation for 2018

Depletion base for 2018
Base for 2017	$9,250,000
Less: Depletion for 2017	740,000
Plus: Seedling Planting Costs	120,000
Depletion base for 2018	$8,630,000

Calculation of depletion for 2018

$$\begin{gathered} \text{Depletion}=\text{Depletion}\text{base}\times \frac{\text{Harvested}\text{timber}}{\text{Estimated}\text{timber}} \\ =\$8,630,000\times \frac{774,000}{6,450,000} \\ =\$1,035,600 \end{gathered}$$

Calculation of depreciation for 2018

$$\begin{gathered} \text{Depreciation}=\frac{\text{Depreciation} \text{base}}{\text{Useful}\text{life}} \\ =\frac{\$216,000}{15} \\ =\$14,400 \end{gathered}$$

(c) Computing depletion and depreciation for 2019

Depletion Base for 2019
Base for 2018	$ 8,630,000
Less: Depletion for 2018	1,035,600
Plus: Seedling Planting Costs	150,000
Depletion Base for 2019	$ 7,744,400

$$\begin{gathered} \text{Calculationofdepletionfor2019} \\ \text{Depletion}=\text{Depletion}\text{base}\times \frac{\text{Harvested}\text{timber}}{\text{Estimated}\text{timber}} \\ =\$8,630,000\times \frac{650,000}{6,500,000} \\ =\$774,440 \\ \text{Calculationofdepreciationfor2019} \\ \text{Depreciation}=\frac{\text{Depreciation} \text{base}}{\text{Useful}\text{life}} \\ =\frac{\$216,000}{15} \\ =\$14,400 \end{gathered}$$