Question

1. Last Chance Mine purchased a coal deposit for $1,209,350. It estimated it would extract 18,050 tons of coal from the deposit LC mined the coal and sold it, reporting gross receipts of $1.37 million, $7.65 million , and $5.5 million for years 1-3. During years 1-3,LC reported new income (loss) from the coal deposit activity in the amount of ($17,400), $585,000, and $405,000. In years 1-3, LC actually extracted 19,050 tons of coal as follows:

(1) (2) Depletion Tons Extracted per year

Tons of coal Basis (2)/(1) Year 1 Year 2 Year 3

18,050 $1,209,350 $67 3,750 11,050 4,250

a) What is Last Chance's cost depletion for years 1,2,3?

Year 1 XXX

Year 2 XXX

Year 3 XXX

B) What is Last Chance's percentage depletion for each year (the applicable percentage for coal is 10 %)?

Year 1 XXX

Year 2 XXX

Year 3 XXX

C) Using the cost and percentage depletion computations from parts A and B, what is Last Chance's actual depletion for each year?

Year 1 XXX

Year 2 XXX

Year 3 XXX

Answer 1

Depletion occurs with the assets that belongs to the category of natural resources such as, oil reserves, coal blocks, timber etc. The extraction of these assets reduces the value of these assets and this is termed as depletion. Depletion costing is used for determining the fall in value of these assets resulting from such extraction.

As per the above question the company purchased a coal deposit of $1,209,250 and expected to extract 18,050 tonnes of coal from the deposit with gross receipts of $1.37 million, $7.65 million and $5.5 million for the years 1-3 respectively. It reported a net income (loss) of ($17,400), $585,000 and $405,000 during the years 1-3 respectively.

A. Cost of depletion of Last Chance company can be computed in the following manner:

Tons of Coal asis Rate ear I Year 2 Year 3 18050 $1,209,350 67 3750 11050 4250 Particulars ear l ear2 ear 3 Tons Extracted I Basis II Cost of Depletion (IxII) 3750 $67 S251,250 11050 $67 S740,350 4250 $67 S284,750

Cost of depletion for Year 1, Year 2 and Year 3 is $251,250, $740,350, and $,284,750 respectively.

B. Last Chance's percentage depletion is shown in the table below.

S. No Particulars ear l ear II Year III Net Income from activ Gross Income Percentage Percentage Depletion Expense ($17,400) $1,370,000 10% $585,000 $7,650,000 10% $405,000 $5,500,000 10% $137,000 S0 $765,000 $292,500 $550,000 $202,500 IV 50% of Net Income Limitation Allowable percentage depletion Lower of IV and V) SO S292,500 S202,500

C. Last Chance's actual depletion is greater of the cost of depletion computed in part A and allowable percentage depletion computed in part B.

S. No. Particulars Wenaur )[ Year III $740,350 $292,500 $284,750 $202,500 Cost of Depletion $251,250 S0 Deductible Depletion Expense (Greater of 1 and Ш) S251,250 S740,350 S284,750

The deductible depletion expense for the Year 1, Year 2 and Year 3 is $251,250, $740,350, and $,284,750 respectively.