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 estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion expense for the current year?
A) $60,000
B) $90,000
C) $110,000
D) $300,000
E) None of these

Question

Quizplus · Accepted Answer

To calculate cost depletion, we divide the total cost of the asset (in this case, the extraction rights) by the estimated recoverable units (5,000 pounds of turquoise), to determine the cost per unit. 
Cost per unit = $300,000 / 5,000 pounds = $60 per pound

In the current year, Santa Fe extracted 1,500 pounds of turquoise. So, the cost depletion expense for the year is: 
Cost depletion expense = 1,500 pounds x $60 per pound = $90,000

Therefore, the correct answer is B.

Santa Fe Purchased the Rights to Extract Turquoise on a Tract