Conan O’Brien Logging and Lumber Company owns 3,900 acres of timberland on the n

Question

Conan O’Brien Logging and Lumber Company owns 3,900 acres of timberland on the north side of Mount Leno, which was purchased in 2002 at a cost of $580 per acre. In 2014, O’Brien began selectively logging this timber tract. In May of 2014, 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 $150,000, were destroyed, as well as the logging equipment, with a net book value of $348,900.

At the time of the eruption, O’Brien had logged 20% of the estimated 520,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of $300 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 $722,800. The timber can be sold for pulp wood at an estimated price of $2 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.

a) Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno.

Depletion cost per board foot $

b) Prepare the journal entry to record the depletion prior to the eruption.

c) If this tract represents approximately half of the timber holdings of OBrien, determine the amount of the extraordinary loss due to the eruption of Mount Leno for the year ended December 31, 2012.

Extraordinary loss due to the eruption of Mount Leno $

Explanation / Answer

(a) Harvested tinber = 20% of 520000

= 104000 board feets

Cost prior to harvesting = $580 per hectare

= $580*3900

= $2262000

Cost after harvesting = $300 per hectare

= $300*3900

= $1170000

Depletion cost = $2262000 - $1170000

= $1092000

Depletion cost per board foot of the timber harvested = $1092000/104000

= $10.50

(b) Journal entry for depletion

Profit and loss A/c Dr. $1092000

To Timber land $1092000

(being depletion cost of timberland)

(c) Amount of extraordinary loss

Logging roads $150000

Add: logging equipment $348900

Add: Estimated cost to salvage downed timber $722800   

Total $1221700

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