Conan Logging and Lumber Company, a small private company that follows ASPE, owns 3,000 hectares of timberland on the north side of Mount Leno, which was purchased in 2008 at a cost of $550 per hectare. In 2020, Conan began selectively logging this timber tract. In May 2020, Mount Leno erupted, burying Conan’s timberland under 15 cm of ash. All of the timber on the Conan tract was downed. In addition, the logging roads, built at a cost of $150,000, were destroyed, as well as the logging equipment, with a carrying amount of $300,000.

At the time of the eruption, Conan had logged 20% of the estimated 500,000 cubic metres of timber. Before the eruption, Conan estimated the land to have a value of $200 per hectare after the timber was harvested. Conan includes the logging roads in the depletion base. Conan estimates it will take three years to salvage the downed timber at a cost of $700,000. The timber can be sold for pulpwood at an estimated price of $3 per cubic metre. The value of the land is unknown, but must be considered nominal due to future uncertainties.

Instructions

a. Determine the depletion cost per cubic metre for the timber that was harvested before Mount Leno erupted.

b. Prepare the journal entry to record the depletion before the eruption.

c. Determine the amount of the estimated loss before income taxes and show how the losses of roads, machinery, and timber and the timber salvage value should be reported in Conan’s financial statements for the year ended December 31, 2020.

d. Digging Deeper As an investor in Conan Logging and Lumber Company, do you have any concerns about the eruption of Mount Leno?