Question

1. Last Chance Mine (LC) purchased a coal deposit for $750,000 on January 1, 2017. LC is a calendar year-end company. The company estimated it would extract 12,000 tons of coal from the deposit.  LC mined the coal and sold it reporting gross receipts of $1 million, $3 million, and $2 million for years 2017 through 2019, respectively.  During years 2017 – 2019, LC reported net income (loss) from the coal deposit activity in the amount of ($20,000), $500,000, and $450,000, respectively.  In years 2017 – 2019, LC actually extracted 13,000 tons of coal as follows:

Tons extracted per year
2017	2018	2019
2,000	7,200	3,800

Assume for each tax year that the cost and percentage depletion methods follow the methods discussed in the text (and my notes):

1. What is Last Chance’s cost depletion for 2017, 2018, and 2019?
   
   
   
   
2. What is Last Chance’s percentage depletion for each year (the applicable percentage for coal is 10 percent)?
   
   
   
   
3. Using the cost and percentage depletion computations from the previous parts, what is Last Chance’s actual depletion expense for each year? HINT: FILL OUT THE TABLE BELOW. Note that you will not be given this table to fill out on the midterm.
   

	Year 1	Year 2	Year 3	Explanation
(1) Cost depletion				Part a
(2) Percentage depletion				Part b
Deductible depletion expense				Greater of (1) or (2)

Answer 1

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Last chance
What is Last Chance’s cost depletion for 2017, 2018, and 2019?
Price of coal deposit	750,000.00
Estimated tons	12,000.00
Depletion rate per ton	62.50
	Year 1	Year 2	Year 3
Tons extracted	2,000.00	7,200.00	3,800.00
Depletion rate per ton	62.50	62.50	62.50
Cist Depletion expense	125,000.00	450,000.00	175,000.00
*This is the remaining basis. Under the cost depletion method, the taxpayer’s amortization is limited to the cost basis in the natural resource. The full amount of amortization would have been $237,500 if this were not the case.
What is Last Chance’s percentage depletion for each year (the applicable percentage for coal is 10 percent)?
	Year 1	Year 2	Year 3	Remarks
Net Income (before Depletion expense) (A)	(20,000.00)	500,000.00	450,000.00	Given in question
Gross Income (B)	1,000,000.00	3,000,000.00	2,000,000.00
Percentage (D)	10%	10%	10%
Percentage Depletion expense before limit (F)	100,000.00	300,000.00	200,000.00	B*D
50% of Net Income limitation (G)	-	250,000.00	225,000.00	A*50%
Allowable Percentage Depletion	-	250,000.00	200,000.00	Lesser of F or G
It is to be noted that percentage depletion is not limited to the basis in the property.
Using the cost and percentage depletion computations from the previous parts, what is Last Chance’s actual depletion expense for each year? HINT: FILL OUT THE TABLE BELOW. Note that you will not be given this table to fill out on the midterm.
	Year 1	Year 2	Year 3	Remarks
1. Cost Depletion	125,000.00	450,000.00	175,000.00	As per Part a
2. Percentage Depletion	-	250,000.00	200,000.00	As per Part b
Deductible Depletion expense	125,000.00	450,000.00	200,000.00	Greater of 1 or 2