SA Forest Resources purchased forest acreage for $500,000 from which an estimated 200 million board feet of lumber are recoverable. The company will sell the lumber for $0.10 per board foot. No lumber will be sold next year because an environmental impact statement must be completed before harvesting can begin. In years 2 through 10, however, the company expects to remove 20 million board feet per year. The inflation rate is 8%, and the company’s MARR is 10%. Determine the depletion amount in years 1 and 2 by the cost depletion method.
What will be an ideal response?
CDt = 500,000/200 = $2500 per million board feet
Year 1: There is no depletion deduction in year 1 because no lumber will be
harvested until year 2.
Year 2: Cost depletion = 2500(20)
= $50,000
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