Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it reporting gross receipts of $1.8 million, $2.5 million, and $2 million for years 1 through 3, respectively. During years 1 - 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount of ($100,000), $400,000, and $100,000, respectively. In years 1 - 3, Lucky Strike actually extracted 300,000 ounces of silver as follows:
What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?

Question

Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it reporting gross receipts of $1.8 million, $2.5 million, and $2 million for years 1 through 3, respectively. During years 1 - 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount of ($100,000), $400,000, and $100,000, respectively. In years 1 - 3, Lucky Strike actually extracted 300,000 ounces of silver as follows: 
What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?

Quizplus · Accepted Answer

The depletion expense is $450,000, the greater of cost or percentage depletion. Cost depletion is $450,000 ($1,500,000 ÷ 500,000) × 150,000. Percentage depletion is $200,000; the lesser of the statutory percentage $375,000 ($2,500,000 × .15) or $200,000 [($400,000 × 50%) = 50 percent of net income].

Lucky Strike Mine (LLC) Purchased a Silver Deposit for $1,500,000