P11-6 (Depletion, Timber, and Extraordinary Loss)

Conan O’Brien Logging and Lumber Company owns 3,200 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 $160,000, were destroyed, as well as the logging equipment, with a net book value of $349,200.

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 $310 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 $712,000. 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. (Round answer to 2 decimal places.)

b. Prepare the journal entry to record the depletion prior to the eruption. (Round

per unit answer to 2 decimal places,e.g. 0.45 for computation purposes and final answer to 0 decimal places, e.g. $45,892. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually)

c. 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. (Do not round intermediate computations and round your answer to 0 decimal places, i.e. 25,250.)