Question

Lucky Strike Mine purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it reporting gross receipts of $2.5 million during its first tax year. If Lucky Strike extracted 150,000 ounces of silver during its first tax year, what is Lucky Strike's depletion expense for the year using cost depletion?

Answer 1

$450,000

Step-by-step explanation:

estimated silver deposit 500,000 ounces

cost $1,500,000

depletion expense per ounce of silver = deposit cost / estimated reserves = $1,500,000 / 500,000 ounces = $3 per ounce of silver

since Lucky Strike extracted 150,000 or silver, its depletion expense = 150,000 ounces x $3 per ounce = $450,000

Depletion expense is used when companies extract natural resources, e.g. mines, oil and gas. Generally the cost of the total deposit or reserve includes exploration and development costs which are generally capitalized and expensed according to the estimated reserves.