Final answer:
The appropriate terms to fill the blanks are 'produce' for the first and 'sell' for the second, corresponding to option (c) Produce, Deplete. Percentage depletion applies to production, while cost depletion is tied to the sale or extraction of the resource.
Step-by-step explanation:
Businesses deduct percentage depletion when they produce the natural resource, and they deduct cost depletion in the year they sell or extract the natural resource. Hence, the correct option is (c) Produce, Deplete.
Depletion is a form of depreciation for mineral resources, where a company deducts a portion of the resource's initial value from its taxable income throughout the resource's productive life. Percentage depletion allows a business to deduct a fixed percentage typically linked to the product's sales to account for the depletion of the resource over time. On the other hand, cost depletion involves assigning a fixed cost to every unit of product sold, calculated based on the total estimated quantity of the resource and its cost.
Understanding these concepts is vital in fields like accounting and business, where the correct application of tax rules can affect a company's financial strategy and net income.
To better understand this concept, you can think of the process of extracting oil from the ground as a mining operation. Before extracting the oil, companies need to perform exploration to locate the oil reserves. This can involve activities such as seismic surveys and drilling test wells. Once the oil reserves are discovered, the companies can begin the actual extraction process by drilling production wells and pumping the oil to the surface.