Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $956,250 for extraction rights. A geologist estimates that Santa Fe will recover 11,250 pounds of turquoise. During the current year, Santa Fe extracted 3,375 pounds of turquoise, which it sold for $608,000. What is Santa Fe's cost depletion deduction for the current year?
A) $191,250
B) $286,875
C) $346,250
D) $956,250
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

Cost depletion is calculated by dividing the cost of the extraction rights ($956,250) by the total estimated pounds of turquoise to be extracted (11,250 pounds) to get the depletion per pound ($85 per pound).

For the current year, Santa Fe extracted 3,375 pounds of turquoise, so the depletion expense is 3,375 x $85 = $286,875.

Santa Fe Purchased the Rights to Extract Turquoise on a Tract