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18 August, 14:03

Wes acquired a mineral interest during the year for $10,000,000. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were mined, and 45,000 tons were sold for $12,000,000. Other related expenses amounted to $5,000,000. Assume the mineral depletion rate is 22%. a. What is the taxable income before the deduction for depletion? $ b. Under cost depletion, what is the amount of the deduction? $ c. Under percentage depletion, what is the amount of the deduction? $ d. Wes's lowest taxable income after the depletion deduction is $

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  1. 18 August, 17:24
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    a. $7,000,000

    b. $1,800,000

    c. $2,640,000

    d. $4,360,000

    Explanation:

    Given:

    Total investment = $10,000,000

    Total Units = 250,000

    Unit sold = 45,000

    Sale value = $12,000,000

    Expenses = $5,000,000

    Depletion rate = 22%

    The Taxable Income before the deduction for depletion = Gross Total Income - Related Expenses.

    The Taxable Income before the deduction for depletion

    = $12,000,000 - $5,000,000

    = $7,000,000

    Under Cost Depletion

    Amount of the deduction = (Total Investment in Asset/Total Unit) * Actual unit sold.

    Amount of the deduction = ($10,000,000/250,000) * 45,000

    Amount of the deduction = $1,800,000

    Under Percentage Depletion

    Amount of the deduction = lesser of (Gross income's 50%) or (depletion rate% of total sale)

    Amount of the deduction = lesser of (7,000,000 50%) or (12,000,000 22%)

    = $2,640,000

    Wes's lowest taxable income after the depletion deduction = The Taxable Income before the deduction for depletion - amount of the deduction

    Wes's lowest taxable income after the depletion deduction = $7,000,000

    - $2,640,000

    = $4,360,000
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