Keystone Mining Company had total depletable capitalized costs of $828,000 for a mine acquired in early 2016. It was estimated that the mine contained 920,000 tons of recoverable ore when production began. During 2016, 46,000 tons were mined, and 174,800 tons were mined in 2017.
INSTRUCTIONS
1. Compute the depletion expense in 2016 and 2017 for financial accounting purposes. What accounts will be debited and credited to record the depletion?
2. a. In 2016, 46,500 tons of ore were sold for $4,600,000. For tax purposes, operating expenses of the mine were $600,000. The taxpayer may deduct either cost depletion or percentage depletion, which for the type ore produced is 8 percent of production sold from the mine. (Assume, however, that percentage depletion is limited to the amount of net income from the property.) What would be the amount of percentage depletion allowable in 2016?
b. What would be the amount of cost depletion allowable for tax purposes in 2016, assuming that capitalized mineral costs are the same for tax purposes as for financial accounting purposes?
c. What will be the amount of depletion based on cost that the company could deduct on its tax return in 2017 if it deducts percentage depletion in 2016?
d. Suppose that in the first three years of the mine's life, the company took percentage depletion totaling $820,000. In the fifth year of the mine's life, production proceeds were $5,300,000. How much percentage depletion could the company deduct in the fifth year?
Analyze: What explanation do you think might be given for the deviation of income tax rules from basic accounting principles in the determination of depletion of costs of minerals?