True Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would

Question

True Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. True mined the silver and sold it reporting gross receipts of $1.8 million, $2.5 million, and $2 million for years 1 through 3, respectively. During years 1 - 3, True reported net income (loss) from the silver deposit activity in the amount of ($100,000), $400,000, and $100,000, respectively. In years 1 - 3, True actually extracted 300,000 ounces of silver as follows:

ounces extracted per year:

year 1: 50,000 year 2: 150,000 year 3: 100,000

what is True's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?

Explanation / Answer

Depletion expense for year 2 = Cost – Salvage/Estimated number of units* Number of units extracted

= $1,500,000 - $0/500,000 ounces * 150,000 ounces

= $450,000

If 15% percentage depletion is used:

Percentage of depletion allowance = Gross receipts * 15%

= $2,500,000*15/100

= $375,000

So the cost of depletion is high, so it would be beneficial to get less taxed because high depletion expense will decrease the net income which is to be taxed

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