On January 15, 2018, 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 incurred expenses during 2018 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2018.
A) $150,000.
B) $175,000.
C) $176,000.
D) $200,000.

Question

Quizplus · Accepted Answer

The cost depletion per unit is $7 ($3,500,000 / 500,000 units). For 25,000 units sold, the cost depletion is $175,000 (25,000 units x $7). The percentage depletion is $176,000 (22% of $800,000 revenue), but it cannot exceed the cost depletion. Therefore, the depletion deduction is $175,000.

On January 15, 2018, Dillon Purchased the Rights to a Mineral