How to Calculate the Book Value of Timber Rights Using Units-of-Production Method

What method is used to calculate the book value of timber rights?

The units-of-production method

Answer:

To calculate the book value of the timber rights at the end of 2025 using the units-of-production method, divide the cost of the timber rights by the estimated salable timber feet to determine the depletion rate. Then, calculate the total depletion for the timber harvested and sold during 2024 and 2025. Finally, subtract the total depletion from the cost of the timber rights to find the book value.

Explanation: To calculate the book value of the timber rights at the end of 2025 using the units-of-production method, we need to determine the depletion expense. Depletion expense is calculated by dividing the cost of the timber rights by the estimated salable timber feet. In this case, the cost of the timber rights was $273,000 and the estimated salable timber feet was 910,000. Therefore, the depletion rate is $273,000 / 910,000 = $0.30 per timber foot.

Next, we need to determine the total depletion for the timber harvested and sold during 2024 and 2025. The company harvested and sold 820,000 feet of timber during this period, so the total depletion would be 820,000 feet x $0.30 = $246,000.

Finally, we can calculate the book value of the timber rights at the end of 2025. The book value is the cost of the timber rights minus the total depletion. In this case, the book value would be $273,000 - $246,000 = $27,000.