Question

Charlie purchased land containing a large amount of trees for $225,000. He estimates the value of the land without the trees is $25,000 and that the timber is worth $200,000. He also estimates that he can get 1 million board feet of lumber from cutting the trees. In the first year of his endeavor, he cuts 250,000 board feet.

Required:
a. Assuming Charlie uses the cost depletion method, his depletion expense for the year is $ ___________.

Answer 1

Using the cost depletion method, Charlie's depletion expense for the first year is calculated to be $50,000, based on the cost of the timber and the amount cut during the year.

Step-by-step explanation:

Calculation of Depletion Expense

Charlie purchased land with timber and is now ready to calculate the depletion expense for the first year. Depletion is similar to depreciation but applies to natural resources. Charlie's initial investment for the timber was $200,000, and he estimates 1 million board feet of lumber in total. Having cut 250,000 board feet in the first year, we calculate the depletion rate per board foot as follows:

Depletion Rate per Board Foot = Total Cost of Timber / Total Board Feet = $200,000 / 1,000,000 board feet = $0.20 per board foot

Now, we calculate the depletion expense for the year:

Depletion Expense for the Year = Depletion Rate per Board Foot * Board Feet Cut in the Year = $0.20 * 250,000 board feet = $50,000

Therefore, Charlie's depletion expense for the year is $50,000.