Question

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion expense for the current year?

A. $60,000
B. $90,000
C. $110,000
D. $300,000
E. None of these

Answer 1

The final answer is B. $90,000.This represents the portion of the cost of the extraction rights allocated to the amount of turquoise extracted in the current year.

Explanation

Santa Fe's cost depletion expense for the current year is $90,000. This is calculated by applying the formula for depletion expense, which is (Total cost of the natural resource / Total estimated units of the resource) * Number of units extracted in the current year. In this case, the cost depletion expense is ($300,000 / 5,000 pounds) * 1,500 pounds = $90,000. This represents the portion of the cost of the extraction rights allocated to the amount of turquoise extracted in the current year.

Santa Fe calculates its cost depletion expense each year based on the proportion of the total estimated resource it has extracted. The cost depletion method allocates the total cost of the natural resource over the expected units to be extracted, allowing Santa Fe to account for the portion of the asset used or extracted during the year. In this scenario, with 1,500 pounds of turquoise extracted from the total estimated 5,000 pounds, the cost depletion expense amounts to $90,000 for the current year.

This method allows Santa Fe to accurately reflect the cost of the natural resource extracted in its financial statements, ensuring a more accurate representation of expenses related to the extraction process.

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