Question

On January 15, 2015, Dillon 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. Dillon incurred expenses during 2015 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2015.

1) 175,000
2) 200,000
3) 250,000
4) 150,000
5) 176,000

Answer 1

Dillon's depletion deduction for 2015 is $220,000.

Step-by-step explanation:

To determine Dillon's depletion deduction for 2015, we need to calculate the total amount of depletion for the units mined. First, calculate the depletion per unit by dividing the purchase price by the estimated recoverable units: $3,500,000 / 500,000 = $7 per unit. Next, calculate the depletion for the units mined by multiplying the depletion per unit by the number of units mined: $7 * 40,000 = $280,000. Finally, subtract the expenses incurred during 2015 from the depletion for the units mined to find Dillon's depletion deduction: $280,000 - $500,000 = $220,000.