Question
Horeford Mines, Inc. paid $15,000,000 for mineral reserves outside of a small town in Arkansas. The company estimates that about 32,000 tons of the mineral
Horeford Mines, Inc. paid $15,000,000 for mineral reserves outside of a small town in Arkansas. The company estimates that about 32,000 tons of the mineral are available at that location. For the first year of operations at the location, Horeford reports the following:
Selling price per ton $800
Tons sold 5,000
Operating expenses $1,000,000
Intangible drilling costs $400,000
The company elects to capitalize the intangible drilling costs. The mineral has a statutory percentage depletion rate of 20%. For this type of mineral, percentage depletion cannot exceed 50% of the taxable income from the property before the depletion allowance.
(A) IF THE COMPANY ELECTS TO USE PERCENTAGE DEPLETION, WHAT IS THE AMOUNT OF THE PERCENTAGE DEPLETION FOR THE FIRST YEAR OF OPERATIONS?
(B) IF THE COMPANY ELECTS TO USE COST DEPLETION, WHAT IS THE AMOUNT OF COST DEPLETION FOR THE FIRST YEAR OF OPERATIONS?
(C) IF THE COMPANY ELECTS TO USE PERCENTAGE DEPLETION, WHAT IS THE AMOUNT OF THE NET TAXABLE INCOME FROM THE PROPERTY FOR THE FIRST YEAR OF OPERATIONS?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started