Company A had a total deletable capitalized cost of $656,000 for a mine acquired

ID: 2351849 • Letter: C

Question

Company A had a total deletable capitalized cost of $656,000 for a mine acquired in early 2010. It was estimated that the mine contained 820.000 tons of recoverable ore when
production began. During 2010, 20,500 tons were mine, and 41,000 tons were mined in 2011.
1. Compute a depletion expense in 2010 and 2011 for financial accounting purposes. What accounts will be debited and credited to record depletion?
2. a. In 2010, 20,500 tons of ore were sold for $2,050,000. For tax purposes, operating expenses of the mine were $500,000. The taxpayer may deduct either cost depletion or percentage depletion,
which for the type ore produced 8% of production sold from mine? Assume that percentage depletion is limited to the amount of net income from the property. What would be amount of depletion
allowable in 2010?
b. What would be the amount of cost despletion allowable for tax purposes in 2010, assuming that capitalized mineral costs are the same for tax purposes as for financial accounting?
c. What will be the amount of depletion based on cost that the company could deduct on its tax return in 2011 if it deducts percentage depletion in 2010?
d. Suppose in the first 3 years of mine's life. The company took percentage depletion totaling $654.000. Th the 5th year of the mine's life, production proceeds were $4,300,000.
How much percentage depletion of cost of mineral?

Explanation / Answer

Sales

2050000

Less: Operating expense

500000

EBITD

1550000

Depletion

16400

Allowble income for tax in 2010

1533600

Actual tons

820000

for first 3 years depletion of tons

817500

Reamin for forsequent year

2500