Question

BLANK purchased a coal deposit for $2,282,400. It estimated it would extract 15,850 tons of coal from the deposit. BLANK mined the coal and sold it, reporting gross receipts of $1.21 million, $5.1 million, and $4.3 million for years 1 through 3, respectively. During years 1–3, BLANK reported net income (loss) from the coal deposit activity in the amount of ($16,500), $730,000, and $527,500, respectively. In years 1–3, BLANK actually extracted 16,850 tons of coal as follows: (Leave no answer blank. Enter zero if applicable. Enter your answers in dollars and not in millions of dollars.)

(1)	(2)	Depletion (2)/(1)	Tons Extracted per Year
Tons of Coal	Basis	Rate	Year 1	Year 2	Year 3
15,850	$2,282,400	$144.00	4,150	7,300	5,400

a. What is BLANK'S cost depletion for years 1, 2, and 3?

YEAR 1=

YEAR 2=

YEAR 3=

What is BLANK'S percentage depletion for each year (the applicable percentage for coal is 10 percent)?

YEAR 1=

YEAR 2=

YEAR 3=

Using the cost and percentage depletion computations from parts (a) and (b), what is BLANK'S actual depletion expense for each year?

YEAR 1=

YEAR 2=

YEAR 3=

      

Answer 1

Solution Computation of BLANK cost depletion for Year! Given in the question . The property's baro for depletion = $2,282,400 and estimated tons of coal which can be extracted 15, 850 tons. . Depletion per ton = $2,282,400 - $144 15,850 Depletion per ton. Actual tons of coal extracted in Year I 4,150 tons. Cost depletion deduction - Actual tous extracted & 2 4,150 x 144 - $ 597,600 Year 2 Actual tons of coal extracted in Year 2 = 7,300 tons & Depletionber ton - Cost depletion deduction - Actual tous extracted 1,300 x 144 - $2,051,200 Year 3 - Actual tons of coal lost of depletion extracted in Year 3 5 , 400 tons. - Actual tons extracted x Depreciation perth = 5H00 X1N4 $763,200

Compulation of BLANK's percentage depletion for each year. Year I For the purpose of percentage depletion, gross income from the property needs to be obtained and multiplied by the applicable depletion percentage. Applicable % for coal = 104. Grows income of year $1,210,000 $1.21 millions) " Percentage depretion deduction = $ 1,210,000 x10 % $121,00 Year a Applicable % for coal a 10%. Gorrons in some of year 2 a 85,100,000 €85.1 million) :. Percentage depletion deduction a $5,100,000 * 10%. - $510,000 Year 3 Applicable % for coal = 10% Grom income of year 3 = $4,300,000 ($4.3 million). .. Percentage depletion decluction a $4,300,000 x 10% - $430,000 Page 2

BLANKI actual depection expense for each year. The IR3 requires the land owner to compare the two methods when determining defection deduction and to use the method which provides the hargest deduction . Hence i Year! Cost depletion $597,600 $121,000 depution a Percentage :. Actual depletion expense = $597,600 Year a Cost depletion Percentage depletion 2 - - $1,051,200 $ 510,000 $1,051, 200 Actual depiction expence Year 3 2 $763,200 Cost depletion = depletion Percentage $430,000 = $763,200 ... Actual depletion expense Page 3

Extra notes :- (1) The IRS defines depletion as "the using up of natural resources by mining, quarrying drilling or felling". Recognizing that oil , gas and other uninerals are used up or depleted as they are extracted, the IRS allows for a reasonable income tax deduction based on depletion of the mineral resource (coal, in this question) (ii) The IRS requires a landowner to compone a methods when determing the depletion deduction and to use the method which provides the largest deduction. c cost depiction and percentage depletion method.) Page 4