Question

A furniture company buys a forest to obtain wood for manufacturing furniture. The related costs to the forest are:

Cost of buying the forest = $730,000,000

Wood expected to be extracted = 400,000 ton

Cost of restoration of the forest = $120,000,000

Residual/salvage value = $233,000,000

Trees cut in year 1 = 107,000 tons

Trees cut in year 2 = 89,000 tons

Compute the depletion rate and depletion charge for the first 2 years.

Answer 1

Given,

Cost of buying the forest = $730,000,000

Wood expected to be extracted = 400,000 ton

Cost of restoration of the forest = $120,000,000

Residual/salvage value = $233,000,000

Trees cut in year 1 = 107,000 tons

Trees cut in year 2 = 89,000 tons

For calculation of depletion rate and depletion charge , first we have to calucuate depletion base

Depletion base = Acquisition cost + Restoration cost

=730,000,000 + 120,000,000

Depletion base = $850,000,000

Next step is to calculate depletion rate

Depletion rate = (Depletion base - Slvage value) / Expected wood to be extracted

= (850,000,000-233,000,000)/400,000

= 617,000,000/400,000

Depletion rate = $1,542.5

Next step is to calculate depletion charge

Depletion Charge = Wood extracted during the year * Depletion rate

Depletion charge for 1^st  year = 107,000 * 1542.5 = $165,047,500

Depletion charge for 2^nd year = 89,000 * 1542.5 = $137,282,500