Question

On January 15, 2019, Vern purchased the rights to a mineral interest for $3,500,000. At that time, it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2019 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2019.

Answer 1

Depletion expense for the year is $280,000

Step-by-step explanation:

Depletion per unit = $3,500,000/ 500,000 = 7 per unit

Units produced during the year = 40,000

Cost depletion for the year = 40,000 * 7 = 280,000

Percentage depletion = (800,000 - 500,000) * 22% = 66,000

Since cost depletion is greater than percentage depletion, cost depletion is deducted.

Depletion expense for the year is $280,000