Question

Timber Resource Inc., a forestry company, owns timber resources in northern Quebec. The company produces lumber from these resources. During 20X3, the company cut trees into logs with a fair market value of $600,000. The selling costs estimated at the time were 5% of fair value. At the end of the year, about 20% of these logs have not yet entered production. The 80% that have entered production required $175,000 of production costs to produce lumber into fixed cut lengths that are now available for sale to various customers. By the end of the year, 40% of the lumber was still on hand and ready for sale. There was no work-in-progress at the year-end. Fair-value information for assets owned at the year-end is provided below:

	Timber	Logs	Lumber
Fair Value at end of 20X2	$8,900,000	$110,000	$295,000
Fair Value at end of 20X3	$9,350,000	$125,000	$310,000

Cost to sell are estimated to be 5% for timber, 5% for logs, and 7% for lumber.

Required:

1. Prepare the journal entries to record the transactions during 20X3 as well as any entries needed to adjust year-end balances.

2. Show relevant balances in SCI and SFP related to the above transactions.

Answer 1

Answer :

Requirement 1

Journal entries for 20X3

Dr. Agricultural produce - logs 600,000 x 95% 570,000

  Cr. Biological assets - timber 570,000

To record the timber harvested into logs

Dr. Inventory - lumber (570,000 x 80%) 456,000

  Cr. Agricultural produce    456,000

To record the transfer of the logs into the production of lumber.

Dr. Inventory - lumber 175,000

  Cr. Cash or Accounts payable 175,000

To record production costs

Dr. Cost of goods sold (456,000 + 175,000) x 60% 378,600

  Cr. Inventory - lumber 378,600

To record lumber sold during the year.

Dr. Biological asset - timber 997,500

Cr. Change in value of biological asset 997,500

To adjust the timber to fair value less costs to sell at year end.

9,350,000(.95) - (8,900,000 (.95) - 570,000) = 8,882,500 - 7,885,000

Requirement 2

Balances on SFP

Inventory - lumber (456,000+175,000 - 378,600) 252,400

  (net realizable value 310,000 x 93% = 288,300)

Agricultural produce (570,000-456,000) 114,000

(net realizable value 125,000 x 95% = 118,750)

Biological asset - timber (9,350,000 x 95%) 8,882,500

Balances on SCI

Cost of goods sold (378,600)

Change in fair value of biological asset 997,500