Turquoise Extraction: Understanding Santa Fe's Cost Depletion Deduction

What is Santa Fe's cost depletion deduction for the current year?

During the current year, Santa Fe extracted 1,500 pounds of turquoise and sold it for $200,000. The company purchased the rights to extract turquoise for $300,000 over a five-year period and a geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. Based on this information, what is Santa Fe's cost depletion deduction for the current year?

Answer:

The cost of depletion in the current year is $90,000

To calculate Santa Fe's cost depletion deduction for the current year, we need to consider the cost of the extraction rights and the amount of turquoise extracted. The formula to calculate cost depletion is:

Cost of Depletion = (Cost of Rights x Turquoise Extracted in the Current Year) / Total Estimated Turquoise to be Extracted

Given that the cost of rights is $300,000, the amount of turquoise extracted in the current year is 1,500 pounds, and the total estimated turquoise to be extracted over a five-year period is 5,000 pounds, we can calculate the cost depletion as follows:

Cost of Depletion = ($300,000 x 1,500) / 5,000 = $90,000

Therefore, Santa Fe's cost depletion deduction for the current year is $90,000. This deduction represents the portion of the cost of the extraction rights that can be claimed as an expense in the current year based on the amount of turquoise extracted.