Wes acquired a mineral interest during the year for $10,000,000. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were mined, and 45,000 tons were sold for $12,000,000. Other related expenses amounted to $5,000,000. Assume the mineral depletion rate is 22%. a. What is the taxable income before the deduction for depletion? $ b. Under cost depletion, what is the amount of the deduction? $ c. Under percentage depletion, what is the amount of the deduction? $ d. Wes's lowest taxable income after the depletion deduction is $

a. $7,000,000

b. $1,800,000

c. $2,640,000

d. $4,360,000

Explanation:

Given:

Total investment = $10,000,000

Total Units = 250,000

Unit sold = 45,000

Sale value = $12,000,000

Expenses = $5,000,000

Depletion rate = 22%

The Taxable Income before the deduction for depletion = Gross Total Income - Related Expenses.

The Taxable Income before the deduction for depletion

= $12,000,000 - $5,000,000

= $7,000,000

Under Cost Depletion

Amount of the deduction = (Total Investment in Asset/Total Unit) * Actual unit sold.

Amount of the deduction = ($10,000,000/250,000) * 45,000

Amount of the deduction = $1,800,000

Under Percentage Depletion

Amount of the deduction = lesser of (Gross income's 50%) or (depletion rate% of total sale)

Amount of the deduction = lesser of (7,000,000 50%) or (12,000,000 22%)

= $2,640,000

Wes's lowest taxable income after the depletion deduction = The Taxable Income before the deduction for depletion - amount of the deduction

Wes's lowest taxable income after the depletion deduction = $7,000,000

- $2,640,000

= $4,360,000