Question

On January 1, 2018, Whittle, Inc. purchased timber rights for $2,000,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in 2018 and 280,000 in 2019. Depletion for 2018 equals ______.

Answer 1

Depletion for Whittle, Inc. in 2018 is calculated by taking 10% of the depletable cost basis, which amounts to $150,000.

Step-by-step explanation:

The question relates to the calculation of depletion expense for a resource-purchase transaction. Depletion for a natural resource like timber is similar to the concept of depreciation for capital assets. It is used to allocate the cost of the natural resource over the period it is consumed.

In this case, Whittle, Inc. purchased timber rights for $2,000,000 and expects to produce 2,000,000 cords of wood. The expected salvage value at the end of the four years is $500,000, leaving a depletable cost basis of $1,500,000 ($2,000,000 purchase price - $500,000 salvage value). The company harvested 200,000 cords of wood in 2018, which is 10% of the expected total harvest. Therefore, 10% of the depletable cost basis is taken as depletion for 2018.

So, the depletion for 2018 equals 10% of $1,500,000, which is $150,000.