Question

Last Chance Mine (LCM) purchased a coal deposit for $1,117,500. It estimated it would extract 14,900 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1.13 million, $7.25 million, and $5.7 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 ($17,200), $582,500, and $535,000, respectively. In years 1–3, LCM actually extracted 15,900 tons of coal as follows:

(1)	(2)	Depletion (2)/(1)	Tons Extracted per Year
Tons of Coal	Basis	Rate	Year 1	Year 2	Year 3
14,900	$1,117,500	$75.00	3,300	7,500	5,100

b. What is LCM's percentage depletion for each year (the applicable percentage for coal is 10 percent)?

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

Answer 1

A). LCM cost depletion:Its given total tons of coal is 14,900 therefore 1,000 will be deducted from last year to make total of 14,900

Particulars	Year 1	Year 2	Year 3
Tons Extracted	3,300	7,500	4,100
Depletion Rate	x75	x75	x75
Cost Depletion Expense	247,500	562,500	307,500

B).  LCM's percentage depletion

Particulars	Year 1	Year 2	Year 3
Net income from Activity A	(17,200)	582,500	535,000
Gross Income(B)	1,130,000	7,250,000	5,700,000
Percentage for coal (C)	10%	10%	10%
Percentage depletion Expense before Limit (D)	113,000	725,000	570,000
50% of net income limitation{a*50%)	0	291,250	267,500
Allowable Percentage Depletion, Lesser of D and E	0	291,250	267,500

C). LCM’s actual depletion expense for each year based on Part A and Part b

Particulars	Year 1	Year 2	Year 3
Cost Depletion from Part A	247,500	562,500	307,500
Percentage Depletion from Part B	0	291,250	267,500
Actual Depletion Expense; greater of part A And part B	247,500	562,500	307,500