Depletion of SA Forest Resources' Lumber Acreage: A Cost Depletion Analysis

How to determine the depletion amount for SA Forest Resources' lumber acreage in years 1 and 2 using the cost depletion method?

What is the total cost of the resource and the total amount of lumber recoverable?

Depletion Amount Calculation:

In this case, the total cost of the resource is $500,000, and the total amount of lumber recoverable is 200 million board feet.

The cost depletion method is a way for companies to account for the reduction of a product's reserves. In the case of SA Forest Resources and their lumber acreage, the first step is to determine the total cost of the resource, which is $500,000. This cost represents the initial investment in purchasing the forest acreage.

Next, the total amount of lumber recoverable is 200 million board feet. To find the per-unit cost, we divide the total cost by the total amount of lumber:

$500,000 / 200 million board feet = $0.0025 per board foot

Therefore, the depletion cost per board foot is $0.0025. Now, let's calculate the depletion amount for years 1 and 2:

For year 1, no lumber will be sold due to the completion of an environmental impact statement. Hence, the depletion amount is $0 (0 million board feet x $0.0025 per board foot = $0).

For year 2, the company plans to remove 20 million board feet of lumber. The depletion amount for the second year is calculated as follows:

20 million board feet x $0.0025 per board foot = $50,000

Therefore, the depletion amount for year 1 is $0, and for year 2, it is $50,000.