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Question 3 Depletion Charges - 18 marks) Highlands lumber owns 4,000 hectares of land in Alberta and is a private company that follows ASPE.
Question 3 Depletion Charges - 18 marks)
Highlands lumber owns 4,000 hectares of land in Alberta and is a private company that follows ASPE. They purchased the land in 2007 at a cost of $500
per hectare. It is estimated that the land value is $200 per hectare. During 2016, they selectively logged 25% of the estimated 400,000 cubic metres of timber. Tragically in late 2017 a forest fire destroyed the majority of the timber, as well as the logging road valued at $200,000 and equipment with a carrying value of $250,000. Highlands includes the logging roads in their depletion base calculation.
Highlands estimates it will take 3 years to clean up the land at a cost of $400,000. Of the original 400,00 cubic metres, only 100,000 cubic metres can be
salvaged and sold for $3.50 per cubic metre. The value of the land is now estimated to be worth only half the original value.
Required: (round all answers to 0 decimal place)
a) Determine the depletion cost per cubic metre in 2016, prior to the fire, keep in mind the logging road is considered part of the depletion base and depreciated separately from the timber.
b) Prepare the journal entries to record the depletion in 2016
c) Determine the amount of the estimated loss, taking into consideration the loss of the roads, machinery and the timber salvage value as they would appear in Highlands's financial statements for the year ended December 31, 2017. Comment on how they would be classified in the financial statements. Ignore income taxes.
