Question

Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barrel for a total of $120,000 in depletion expense. He now needs to calculate his percentage depletion in case it is larger. His gross income from the oil extraction is $600,000 and he has $520,000 in operating expenses before depletion expense. Assuming this is domestic production, the amount of percentage depletion expense is $

Answer 1

THIS IS THE COMPLETE QUESTION BELOW;

Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barrel for a total of $120,000 in depletion expense. He now needs to calculate his percentage depletion in case it is larger. His gross income from the oil extraction is $600,000 and he has $520,000 in operating expenses before depletion expense. Assuming this is domestic production, the amount of percentage depletion expense is $______1 of 3. If he uses this method he can deduct $________2 of 3 for tax purposes. He should use the______3 of 3 depletion method to maximize his deduction.

(The percentage depletion rate is15% of gross income and limited to 65% of the net income)

Answer:

1) $52,000

2)$68,000

3) Percentage depletion

Assuming this is domestic production, the amount of percentage depletion expense is ($52,000) If he uses this method he can deduct ($68,000)for tax purposes. He should use the (percentage depletion)method to maximize his deductions.

Explanation:

Given:

Total income = $600,000

operating expense = $520,000

The net income can be calculated as

(Total income - operating expense)

= $600,000 - $520,000 = $80,000

The percentage depletion rate when the gross income is 15% = $600,000 × 0.15

= $90,000

At 65% of the net income can be calculated as

$80,000 × 0.65

= $52,000

1) The percentage depletion rate expenses = $52,000, this is because the $90,000 which is the 15% of the gross income is greater than the value of the net income.

2 )If he uses this method he can deduct

he can deduct The percentage depletion rate expenses from the total of $120,000 in depletion expense which is

$120,000 - $52,000 = $68,000

3) He should therefore use the percentage depletion method to maximize his deductions