Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. During the past several years, 4,000 pounds were extracted. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $250,000. What is Santa Fe's cost depletion expense for the current year?
A) $60,000.
B) $90,000.
C) $190,000.
D) $160,000.
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

The depletion expense is $60,000 ($300,000/5,000) × 1,000. Cost depletion is limited to the taxpayer's basis. As a result, even though 1,500 pounds were extracted, only 1,000 pounds can be expensed under cost depletion.

Santa Fe Purchased the Rights to Extract Turquoise on a Tract