Last Chance Mine (LCM) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, respectively. During years 1–3, LCM reported net income (loss) from the coal deposit activity in the amount of ($20,000), $500,000, and $450,000, respectively. In years 1–3, LCM actually extracted 13,000 tons of coal as follows:
Depletion (2)/
(1) Tons of Coal (2) Basis Depletion (2)/(1) Rate Tons Extracted per Year Year 1 Year 2 Year 3
12,000 $750,000 $62.50 2,000 7,200 3,800
Required:
a. What is LCM's cost depletion for years 1, 2, and 3?
b. What is LCM's percentage depletion for each year (the applicable percantage for coal is 10%)?