On January 1, 2014, Noone Industries Invests $2,000,000 in Land

question 30

Essay

On January 1, 2014, Noone Industries invests $2,000,000 in land that includes a stand of timber and the rights to cut the timber. The property is expected to yield 50,000 cubic metres of timber. After the amount of lumber permitted by law has been cut, Noone expects to be able to sell the land for $400,000 less $150,000 that must be spent on reforestation. Noone invests a further $300,000 in equipment which is expected to last for the same number of units as the property yields, with no residual value.
Instructions
a. Using the units-of-production method, calculate depreciation for 2014 on both the timber investment and for the equipment, assuming that 12,000 cubic metres are sawn in the year.
b. Explain why the units-of-production method is considered the most appropriate method for depreciation of natural resources.

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Definitions:

Ordinary Unsecured Creditors

Creditors whose debts have no preferential treatment under the Corporations Act and are the last to be paid before funds are returned to contributories.

Preferential Unsecured Creditor

A creditor who is not secured by collateral but has the right to be paid before other unsecured creditors in the event of a debtor's bankruptcy.

Trade Creditors

Entities to whom money is owed for goods and services provided in the normal course of business, but which has not yet been paid.

Liquidator's Fee

Charges or payments made to a liquidator for the process of winding up a company, disposing of its assets, and discharging its liabilities.