Question

On January 15, 2020, Dillon purchased the rights to a mineral interest for $3,500,000. At that time, it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Dillon included expenses during 2019 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2020.\

Answer 1

The amount of Dillon's depletion deduction for 2020 is $175,000.

Here, we first need to derive the Depletion rate per unit before we will determine the  Dillon's depletion deduction for 2020.

Given Information

Purchase Cost of Mineral Rights = $3,500,000

Salvage Value = $0                               -        

Number of Units Expected to Recoverable = 500,000 Units

Net Value for Depletion = Purchase Cost of Mineral Rights - Salvage Value

Net Value for Depletion = $3,500,000 - $0

Net Value for Depletion = $3,500,000

Depletion per Units = Net Value for Depletion / Number of Units Expected to Recoverable

Depletion per Units = $3,500,000 / 500,000 units

Depletion per Units = $7.00 per Unit  

• The formula for the Depletion Deduction is Number of Units Sold * Rate Per Unit

Depletion Deduction = 25,000 units * $7.00

Depletion Deduction = $175,000

Therefore, the amount of Dillon's depletion deduction for 2020 is $175,000.

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