Question

. In January, Arco Company purchased the rights to a natural resource for $3,000,000. The estimated recoverable units from the natural resource amount to 3,000,000 units. During the year, Arco sold 100,000 units of the natural resource at $6 per unit and incurred operating costs other than depletion of $4.50 per unit. Assume a 15 percent specified depletion percentage. Based on these facts, compute the company's depletion deduction using both cost depletion and percentage depletion and choosing the higher figure.

Answer 1

CALCULATION OF THE DEPLETION AS PER UNIT OF PRODUCTION METHOD
Purchase Cost of Rights		$                30,00,000
Less: Salvage Value =		$                               -
Net Value for Depletion =		$                30,00,000
Expected to Produce recoverable units =		$                30,00,000	Units
Depletion per Units		$                                1	Per Unit Cost
($ 3,000,000 / 3,000,000)
Depletion cost = 100,000 Units X $ 1 Per unit=		$                  1,00,000
CALCULATION OF DEPLETION COST AS PER DEPELETION % METHOD
Purchase cost of Right =		$                30,00,000
Depletion % =		15%
Depletion Amount =		$                  4,50,000
Answer =Higher figure of Depletion is on based on % = $ 450,000