Question

Last Chance Mine (LCM) purchased a coal deposit for $1,055,700. It estimated it would extract 15,300 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1.26 million, $10.8 million, and $9 million for years 1 through 3, respectively. During years 1–3, LCM reported net income (loss) from the coal deposit activity in the amount of ($18,900), $570,000, and $552,500, respectively. In years 1–3, LCM actually extracted 16,300 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
15,300	$1,055,700	$69.00	2,900	9,300	4,100

c. Using the cost and percentage depletion computations from parts (a) and (b), what is LCM’s actual depletion expense for each year?

	Year Depletion Expense 1 2 3

Answer 1

(a)		Year 1	Year 2	Year 3
	Tons extracted	2,900	9,300	4,100
	Depletion rate	$69.00	$69.00	$69.00
	Cost Depletion	$200,100	$641,700	$213,900
				remaining basis
(b)		Year 1	Year 2	Year 3
	Net income from activity (before depletion expense)	(18,900)	570,000	552,500
	Gross Income	1,260,000	10,800,000	9,000,000
	Percentage	10.00%	10.00%	10.00%
	Percentage Depletion Expense before limit	126,000	1,080,000	900,000
	50% of net income limitation	-	285,000	276,250
	Allowable percentage depletion	-	285,000	276,250
(c)		Year 1	Year 2	Year 3
	Cost depletion	200,100	641,700	213,900
	Percentage depletion	-	285,000	276,250
	Deductible depletion expense	200,100	641,700	276,250	Greater of