Question

The amount of depletion that can be taken on an annual basis is the larger of the amounts computed under the (1) depletion method or the (2) depletion method.

a. Cost, Percentage
b. Percentage, Cost
c. Amortization, Depletion
d. Depletion, Amortization

Answer 1

Depletion is an accounting concept where the larger of either Cost Depletion or Percentage Depletion methods is used to calculate the annual deduction for the exhaustion of natural resource reserves. This is particularly relevant in business and accounting studies pertaining to taxation and resource management.

Step-by-step explanation:

The student's question pertains to a business accounting concept called depletion. Depletion is used to allocate the cost of extracting natural resources from the earth such as minerals, petroleum, timber, etc., and can be calculated using two methods:

• The Cost Depletion method, which allocates the original cost of the resource over the estimated number of units that can be extracted.
• The Percentage Depletion method, which is based on a fixed percentage of the gross income from the resource extraction.

Businesses that extract natural resources can take the larger of the two depletion amounts as a deduction for tax purposes. To comply with the Internal Revenue Service (IRS) regulations, the choice between Cost Depletion and Percentage Depletion should be made on an annual basis. This concept is essential for those studying business, particularly in fields related to accounting, natural resource management, and sustainable business practices.