Problem: (Depreciation Timber and Extraordinary Loss)
Conan O'Brian Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount St. Helens, Which was purchased in 1968, at a cost of $550. per acre. In 1980 O'Brien began selectively logging this timber tract. In May of 1980, Mount St. Helens 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 o$150,000, were destroyed, as well as the logging equipment, with a net book value of $300,000.
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 $200. 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 $700,000. 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.
Instructions:
Q1. Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount St. Helens.
Q2. 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 estimated loss and show how the losses of roads, machinery, and timber and the salvage of the timber should be reported in the financial statement of O'Brien for the year ended December 31, 1980