Question

TRNSMF Mine purchased a platinum deposit for $3,500,000. It estimated it would extract 17,000 ounces of platinum from the deposit. TRNSMF mined the platinum and sold it reporting gross receipts of $500,000 and $8 million for years 1 and 2, respectively. During years 1 and 2, TRNSMF reported net income (loss) from the platinum deposit activity in the amount of ($100,000) and $3,800,000, respectively. In years 1 and 2, TRNSMF actually extracted 2,000 and 8,000 ounces of platinum. What is TRNSMF's depletion expense for years 1 and 2 if the applicable percentage depletion for platinum is 22 percent?

Cost Depletion expense year 1
Cost Depletion expense year 2.
Percentage Depletion expense year 1
Percentage Depletion expense year 2.

Depletion expense claimed year 1
Depletion expense claimed year 2.

Answer 1

1. Cost of Depletion expense Year 1 = Cost * Ounces Extracted / Total Ounces

Cost of Depletion expense Year 1 = 3500000 * 2000 / 17000

Cost of Depletion expense Year 1 = $411765

3. Percentage Depletion expense year 1 = $0 (As the gross receipts are less than cost of depletion, there is taxable loss)

5. Depletion expense claimed in Year 1 = Total cost = $411765

2. Cost of Depletion expense Year 2 = Cost * Ounces Extracted / Total Ounces

Cost of Depletion expense Year 2 = 3500000 * 8000 / 17000

Cost of Depletion expense Year 2 = $1647059

4. Percentage expense year 2 = Gross Receipts * Depletion Percentage

Percentage expense year 2 = 8000000 * 22%

Percentage expense year 2 = 1760000

Thus Percentage expense year 2 = $1760000

6. Depletion expense claimed in Year 2 = Percentage Expense or Cost of depletion whichever is higher

Depletion expense claimed in Year 2 = $1760000 or $1647059 whichever is higher

Depletion expense claimed in Year 2 = $1760000