Question

Dorn purchased the rights to extract turquoise on a tract of land over a five year period. Dorn paid $200,000 for extraction rights. A geologist estimates that Dorn will recover 10,000 pounds of turquoise. During the current year, Dorn extracted 2,500 pounds of turquoise, which it sold for $150,000. What is Dorn’s cost depletion expense for the current year?

Answer 1

Answer:

$50,000

Explanation:

Data provided in the question:

Amount paid for extraction rights = $200,000

Expected turquoise to be recovered = 10,000 pounds

Turquoise extracted in the current year = 2,500 pounds

Selling price of the of the 2,500 pounds turquoise = $150,000

Now,

The cost depletion expense per pound of turquoise

= (Amount paid for extraction rights) ÷ (Expected turquoise to be recovered)

= $200,000 ÷ 10,000

= $20 per pound

Therefore,

Dorn’s cost depletion expense for the current year

= cost depletion expense per pound × Turquoise extracted in the current year

= $20 × 2,500

= $50,000