Depletion Methods (LO. 9) On July 4 of the current year, Lawrence invests $234,0

Question

Depletion Methods (LO. 9) On July 4 of the current year, Lawrence invests $234,000 in a mineral property. He estimates that he will recover 840,000 units of the mineral from the deposit. During the current year, Lawrence recovers and sells 100,800 units of the mineral for $3.60 per unit.

. a. Lawrence's cost depletion deduction for the current year is $ . Lawrence's basis in the mineral property after deducting depletion is $ .

b. The percentage depletion rate is 10%. Lawrence's cost depletion deduction for the current year would be $ . Lawrence's basis in the property after deducting percentage depletion is $ .

c. Using the calculations from parts a and b and knowing that Lawrence's income from the mineral before the depletion deduction is $10,890, respond to the following. Lawrence's percentage depletion deduction for the current year would be $......................... . To maximize his depletion deduction, he should deduct depletion based on the cost method.

Explanation / Answer

Ans a Lawrence cost depletion deduction 28080 Ans Cost of mineral property/Total Estimated units*Production of units in the year 234000*100800/840000 The basis in mineral property $234000-28080 205920 Ans Ans b 10% percentage depletion rate*(No. of units sold*per unit price) 10%*(100800*3.6) Cost depletion deduction 36288 Ans The basis in mineral property $234000-36288 197712 Ans Ans c As per the rule for claimimg deduction is the percentage depletion deduction cannot exceed 50% of taxable income from the mineral property which is before the deduction of precentage depletion So the percentage depletion deduction is limited to 50% of 10890 5445 But cost depletion method is not subject to income limitation. So he should deduct $28080 (from ans a-cost depletion) to maximize his depletion deduction

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