Cypress Timber Company has a December 31 fiscal year end. The following information is related to its Westerlund tract of timber land:
1. Cypress purchased a 50,000-hectare tract of timber land at Westerlund on June 7, 2013, for $50 million, paying $10 million cash and signing a 7% mortgage payable for the balance. Principal payments of $8 million and the annual interest on the mortgage are due each December 31. It is estimated that this tract will yield 1 million tonnes of timber. The timber tract's estimated residual value is $2 million. Cypress expects it will cut all the trees and then sell the Westerlund site in seven years.
2. On June 26, 2013, Cypress purchased and installed equipment at the Westerlund timber site for $196,000 cash. The equipment will be amortized on a straight-line basis over an estimated useful life of seven years with no residual value. Cypress has a policy of recording depreciation for partial periods to the nearest month. The equipment will be scrapped after the Westerlund site is harvested.
3. In 2013, Cypress cut and sold 110,000 tonnes of timber.
4. In 2014, Cypress cut and sold 240,000 tonnes of timber.
Instructions
(a) Prepare the 2013 and 2014 journal entries for the above, including any year-end adjustments.
(b) Show how property, plant, and equipment, natural resources, and related accounts will be reported on Cypress's December 31, 2014, income statement and balance sheet.
TAKING IT FURTHER
If the total estimated amount of units that will be produced (extracted) changes during the life of the natural resource, is it still appropriate to use the units-of-production method? Explain.