On January 15,2014,Vern 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.Vern incurred expenses during 2014 of $500,000.The percentage depletion rate is 22%.Determine Vern's depletion deduction for 2014.

Question

Quizplus · Accepted Answer

$3,500,000/500,000 = $7 per unit
25,000 units sold × $7 = $175,000 cost depletion 22% × $800,000 = $176,000 percentage depletion
Percentage limit ($800,000 - $500,000)× 50% = $150,000 Thus,the deduction is $175,000.

On January 15,2014,Vern Purchased the Rights to a Mineral Interest