Conan O\'Brien Logging and Lumber Company owns 4,000 acres of timberland on the

Question

Conan O'Brien Logging and Lumber Company owns 4,000 acres of timberland on the north side of Mount Leno, which was purchased in 1998 at a cost of $560 per acre. In 2010, O'Brien began selectively logging this timber tract. In May of 2010, 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 $153,000, were destroyed, as well as the logging equipment, with a net book value of $344,100.
At the time of the eruption, O'Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O'Brien estimated the land to have a value of $280 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 $723,600. The timber can be sold for pulp wood at an estimated price of $4 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.

1.Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno.
2. Prepare the journal entry to record the depletion prior to the eruption.
3.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, 2010.

Explanation / Answer

1.Original cost of timber land= 4,000acres x $560 per acre                                             = $22,40,000 Deduct:Cost of residual value ($280 x 4,000)                    = (11,20,000)                                               _____________                                               $11,20,000 Add: Cost of logging roads          1,53,000                                              ______________ Depletion base                        $12,73,000                                             ______________ Depletion cost per board feet   = $12,73,000/500,000                                                 = $2.55 2. Inventory (Dr.) $255,000              Accumulate Depreciation - Timber             $255,000    (To record thedepletion) Working: Depletion 2010 = 20% of 500,000 board feet x $2.55                          = 100,000 board feet x $2.55                          = $255,000 3. Estimated Loss: Loss of Timber[ ($11,20,000 - (20% of 11,20,000)]      = $896,000 Loss of land value (4,000*280)                                      = 1,120,000 Loss of logging roads(1,53,000 - (20% 0f1,53,000)       =    122,400 Loss of logging equipment                                               =    344,100 Cost of salvaging timber                                                         723,600                                                                                         ______________ Total estimated loss                                                           $ 3,206,100                                                                                         ______________ Total loss on Erruption                                $3,206,100 Less: Recovery ($4 x 500,000)                    (2,000,000)                                                                 ______________                                                                   $1,206,100                                                                 ______________ Extraordinary loss due to erruption              $1,206,100 3. Estimated Loss: Loss of Timber[ ($11,20,000 - (20% of 11,20,000)]      = $896,000 Loss of land value (4,000*280)                                      = 1,120,000 Loss of logging roads(1,53,000 - (20% 0f1,53,000)       =    122,400 Loss of logging equipment                                               =    344,100 Cost of salvaging timber                                                         723,600                                                                                         ______________ Total estimated loss                                                           $ 3,206,100                                                                                         ______________ Total loss on Erruption                                $3,206,100 Less: Recovery ($4 x 500,000)                    (2,000,000)                                                                 ______________                                                                   $1,206,100                                                                 ______________ Extraordinary loss due to erruption              $1,206,100

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