Question

On June 15, 2017, Louise purchased the rights to a gravel interest for $1,500,000. At that time, it was estimated that the recoverable units would be 100,000. During the year, 20,000 units were mined and 10,000 units were sold for $200,000. Louise incurred expenses during 2017 of $50,000. Louise's depletion deduction for 2017 using the cost depletion method would be:

a. $200,000.
b. $150,000.
c. $175,000.
d. $10,000.
e. $75,000.

Answer 1

Using the cost depletion method, the depletion deduction for Louise in 2017 is calculated as $150,000, based on the cost per unit of the gravel interest and the number of units sold that year. Correct answer is $150,000.

Step-by-step explanation:

The student's question relates to the calculation of depletion deduction for a gravel interest using the cost depletion method.

By dividing the cost of the property ($1,500,000) by the total recoverable units (100,000), we determine the cost per unit, which is $15. To calculate the depletion deduction for the year, we then multiply the cost per unit by the number of units sold in that year (10,000), which results in a deduction of $150,000 ($15 x 10,000).