Question

A company purchased a land for the extraction of lignite resources for a price of $10 million. 440,000 tons of lignite can be removed from the land. The company sold 23,000 tons in year 1 for a price of $1,000 per ton. Determine the depletion charge for year 1 using a) cost depletion, and b) percentage depletion knowing that the taxable income is equal to $3,000,000.

Answer 1

a) cost depletion,

answer is $ 522,727.27

b) percentage depletion knowing that the taxable income is equal to $3,000,000.

answer is $ 450,000.00

Explanation:

a. Cost depletion method

Cost of depletion=APV/TR *U

where:

APV=adjusted property value or cost

TR=total reserves

U=units extracted in a given period

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APV=10,000,000

TR=440,000

U=23,0000

Depletion = 10,000,000/440000*23000= $ 522,727.27

b. percentage depletion method = government provided rate * Net income

Government provided rate =15%

net income= 3,000,000

Depletion =15%*3,000,000=450,000