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Tree Lovers Inc. purchased 2,500 acres of woodland in which it intends to harvest the complete forest, leaving the land barren and worthless. Tree Lovers paid $5,000,000 for the land. Tree Lovers will sell the lumber as it is harvested and it expects to deplete it over ten years (150 acres in year one, 300 acres in year two, 250 acres in year three, 150 acres in year four, and 100 acres in year five). Calculate the depletion expense for the next five years and create the journal entry for year one.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 11, Problem 7PB
Textbook Problem
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Tree Lovers Inc. purchased 2,500 acres of woodland in which it intends to harvest the complete forest, leaving the land barren and worthless. Tree Lovers paid $5,000,000 for the land. Tree Lovers will sell the lumber as it is harvested and it expects to deplete it over ten years (150 acres in year one, 300 acres in year two, 250 acres in year three, 150 acres in year four, and 100 acres in year five). Calculate the depletion expense for the next five years and create the journal entry for year one.

To determine

Introduction:

Natural resources are part of the land and extracted from land to convert it into the products. They are accounted as inventory in the books of accounts.

To calculate:

The depletionexpense for next five year and to journalize the entry for year one.

Explanation of Solution

Calculation of the depletion rate:

DepletionRate=PurchaseCostoftheNatural ResourcesEstimatedTotal Output

Substitute $5,000,000 for Purchase Cost of the Natural resources and2,500 acres for Estimated Total Output in the above formula.

Depletion rate=$5,000,0002,500=$2,000 per acre

Calculation of depletion expense for next five years:

Year Expected Extraction(acres)(A) Depletion Rate ($ per acre)(B) Depletion Amount(C)   

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Chapter 11 Solutions

Principles of Accounting Volume 1
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