Question

company e purchased a piece of land for its natural resources at a cost of $2,000,000. the land is expected to have a salvage value of $500,000. a lumber expert visited the property and estimated the property to have 750,000 pounds of timber. the first year, the company logged 400,000 pounds of timber and the second year, another 200,000 pounds of timber were logged. calculate the depletion expense rate and calculate the depletion expense the company should recognize in year 1 and year 2:

Answer 1

The the depletion expense rate would be 2.

Rate = (Cost - Salvage Value) / Estimated value

= ($2,000,000 - $500,000) / 750,000 =2

What do you mean by depletion expense?

Depletion expense is an accrual accounting technique used to allocate the cost of extracting natural resources such as wood (timber), minerals, oil from the earth and gas industries, where exploration and development costs are capitalized, and exhaustion is used as a logical system for accounting for these costs as an expense.

Is depletion expense indicate an expense?

Like depreciation and amortization, depletion is a non-cash expense that gradually reduces the cost of an asset through a charge to scheduled income.

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