Ageless Oil Corporation is still eligible to use percentage depletion.During the year its only well produced 6,000 barrels of oil at a cost of $6 per barrel.The corporation subsequently sold all of their production for $8 per barrel.Assuming that the production and sale of oil represented all revenues and expenses for the year, the corporation's deduction for percentage depletion would be (assume the statutory depletion rate for oil is 22%)

Question

Quizplus · Accepted Answer

To calculate the percentage depletion, we need to first calculate the gross income from the sale of oil, which is 6,000 barrels x $8 per barrel = $48,000.

Next, we need to calculate the depletion base, which is the lesser of either the property's adjusted basis (cost) or the property's fair market value at the time of discovery. Since no fair market value is given, we'll assume that the adjusted basis (cost) is used. The cost of 6,000 barrels of oil at $6 per barrel is $36,000.

Now we can calculate the depletion allowance by multiplying the depletion base ($36,000) by the statutory depletion rate for oil (22%): $36,000 x 0.22 = $7,920.

However, the percentage depletion deduction cannot exceed 100% of the gross income from the sale of oil, so the deduction is limited to $48,000.

Therefore, the deductible amount for percentage depletion is $10,560 (the lesser of $7,920 and $48,000). Answer choice B is the closest option.

Ageless Oil Corporation Is Still Eligible to Use Percentage Depletion