Question

Last Chance Mine (LCM) purchased a coal deposit for $2,883,500. It estimated it would extract 18,250 tons of coal from the deposit. LCM mined the coal and sold it, reporting gross receipts of $1.30 million, $8.35 million, and $6.2 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 ($10,400), $520,000, and $282,500, respectively. In years 1–3, LCM actually extracted 19,250 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
18,250	$2,883,500	$158.00	4,450	10,400	4,400

a. What is LCM's cost depletion for years 1, 2, and 3?

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

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Last chance
What is Last Chance’s cost depletion for 2017, 2018, and 2019?
Price of coal deposit	2,883,500.00
Estimated tons	18,250.00
Depletion rate per ton	158.00
	Year 1	Year 2	Year 3
Tons extracted	4,450.00	10,400.00	4,400.00
Depletion rate per ton	158.00	158.00	158.00
Cost Depletion expense	703,100.00	1,643,200.00	537,200.00
*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)	(10,400.00)	520,000.00	282,500.00	Given in question
Gross Income (B)	1,300,000.00	8,350,000.00	6,200,000.00
Percentage (D)	10%	10%	10%
Percentage Depletion expense before limit (F)	130,000.00	835,000.00	620,000.00	B*D
50% of Net Income limitation (G)	-	260,000.00	141,250.00	A*50%
Allowable Percentage Depletion	-	260,000.00	141,250.00	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?
	Year 1	Year 2	Year 3	Remarks
1. Cost Depletion	703,100.00	1,643,200.00	537,200.00	As per Part a
2. Percentage Depletion	-	260,000.00	141,250.00	As per Part b
Deductible Depletion expense	703,100.00	1,643,200.00	537,200.00	Greater of 1 or 2