Question

Exercise 8-30 (Algorithmic) (LO. 8)

Jebali Company reports gross income of $874,600 and other property-related expenses of $568,490 and uses a depletion rate of 19%.

Jebali Company depletion allowance is $ ?

Answer 1

Depletion Allowance- Depletion allowance is like depreciation allowance. It is a form of cost recovery of capital investment made in the business of natural resources and minerals. It is applicable when one has an economic interest in mineral property. When the minerals are extracted from land, the land value reduces. So natural resources and mines lost their value over the passage of time due to extraction of minerals so that types of property are entitled for depletion deduction.
Depletion deduction is allowable on tow basis.
(‘1) Cost depletion- In this method actual capital investment cost are recovered throughout the period of income generation from that property. The cumulative recovery made cannot exceed the original capital investment.
(‘2) Percentage depletion allowance- In this method depletion allowance is calculated as a percentage of gross income generated by the property during the year in question. The maximum deduction is limited to the lesser of following
(‘a) 100 % of taxable income from the property without considering depletion allowance or (‘b) 65 % of taxable income from all sources without considering depletion allowance.
It is to be noted that cumulative depletion allowance in this method may exceed the original capital investment of property.
Calculation of depletion allowance of Jebali Company
Gross Income	874,600
Multiplied by depletion rate	19%
Depletion allowance for current year	166,174