Question

On January 15, 2017, 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 2017 of $500,000. The percentage depletion rate is 22%.

Determine Vern's depletion deduction for 2017.
a. $150,000
b. $175,000
c. $176,000
d. $200,000
e. $250,000

Answer 1

Vern's depletion deduction is $175000

Step-by-step explanation:

given data

mineral interest = $3,500,000

recoverable units = 500,000

mined = 40,000 units

sold = 25,000 units

depletion rate = 22%

to find out

Vern's depletion deduction

solution

we get here depletion expense that is

depletion expense =
`(cost - salvage\ value)/(estimate\ no\ units) * number\ of\ unit\ extracted` ...........................1

put here value we get

depletion expense =
`(3500000 - 0)/(500000) * 25000`

depletion expense = $175000

and

percentage depletion = $800,000 × 22%

percentage depletion = $176000

we know that % depletion method is not accept as IRS for certain natural resources

so we use depletion method is use here

Vern's depletion deduction is $175000