Conan O Conan O Question 2 Conan O\'Brien Logging and Lumber Company owns 3,300
ID: 2376938 • Letter: C
Question
Conan O Conan O Question 2 Conan O'Brien Logging and Lumber Company owns 3,300 acres of timberland on the north side of Mount Leno, which was purchased in 2000 at a cost of $600 per acre. In 2012, O'Brien began selectively logging this timber tract. In May of 2012, Mount Leno erupted, burying the timberland of O'Brien under a foot of ash. All of the timber on the O'Brien tract was downed. In addition, the logging roads, built at a cost of $159,000, were destroyed, as well as the logging equipment, with a net book value of $311,000. At the time of the eruption, O'Brien had logged 20% of the estimated 530,000 board feet of timber. Prior to the eruption, O'Brien estimated the land to have a value of $270 per acre after the timber was harvested. O'Brien includes the logging roads in the depletion base. O'Brien estimates it will take 3 years to salvage the downed timber at a cost of $747,600. The timber can be sold for pulp wood at an estimated price of $3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties. Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno. Prepare the journal entry to record the depletion prior to the eruption. If this tract represents approximately half of the timber holdings of O'Brien, determine the amount of the extraordinary loss due to the eruption of Mount Leno for the year ended December 31, 2012.Explanation / Answer
1.Original cost of timber land= 3300 acres * $600 per acre
= $1,980,000
Deduct:Cost of residual value
($270 *3300) = (891,000)
_____________
$1089,000
Add: Cost of logging roads 1,59,000
______________
Depletion base $12,48,000
______________
Depletion cost per board feet = $12,48,000/530,000
= $2.35
2. Inventory (Dr.) $249,100
Accumulate Depreciation - Timber $249100
(To record thedepletion)
Working:
Depletion 2012 = 20% of 530,000 board feet x $2.35
= 106,000 board feet x $2.35
= $249,100
3. Estimated Loss:
Loss of Timber Land= 80%*1980,000 = 1584,000
Loss of land value (3300*270) = 891,000
Loss of logging roads 80% 0f 1,59,000 = 127,200
Loss of logging eqpt = 311,000
Cost of salvaging Timber= 747,600
_-_________________________________________________
Total estimated Loss $3,660,800
______________
Total loss on Erruption $3,660,800.00
Less: Recovery ($3*80%*530,000) (1272000)
______________
Extraordinary Loss $2,388,800
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