Santa Fe's Turquoise Extraction Rights
How much did Santa Fe pay for extraction rights?
Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $476,000 for extraction rights.
How much turquoise did Santa Fe estimate to recover?
A geologist estimates that Santa Fe will recover 7,000 pounds of turquoise.
How much turquoise did Santa Fe extract and sell during the current year?
During the current year, Santa Fe extracted 2,100 pounds of turquoise, which it sold for $307,000.
What is Santa Fe's cost depletion deduction for the current year?
Final answer: Santa Fe's cost depletion deduction for the current year is $1,164.
Cost Depletion Deduction Calculation
To calculate Santa Fe's cost depletion deduction for the current year, we need to divide the cost of extraction rights by the estimated recoverable pounds of turquoise and then multiply it by the pounds of turquoise extracted during the current year.
In this scenario, Santa Fe paid $476,000 for extraction rights and estimated to recover 7,000 pounds of turquoise. During the current year, they extracted 2,100 pounds and sold them for $307,000. To calculate the cost depletion deduction, we use the formula:
Cost Depletion Deduction = (Cost of Extraction Rights / Estimated Recoverable Pounds of Turquoise) x Pounds of Turquoise Extracted During the Current Year
By substituting the given values into the formula, we can determine that Santa Fe's cost depletion deduction for the current year is $1,164. This deduction helps Santa Fe account for the gradual reduction in the value of their extraction rights as they extract and sell the turquoise.
Understanding cost depletion deductions is essential for businesses involved in natural resource extraction to properly account for the reduction in the value of their assets over time. It ensures accurate financial reporting and helps in making informed business decisions.