Mayfair Mining Company had a total depletable capitalized cost of $656,000 for a mine acquired in early 2013. It was estimated that the mine contained 820,000 tons of recoverable ore when production began, During 2013, 20,500 tons were mined, and 41,000 tons were mined in 2014.
1.) Compute the depletion expense in 2013 and 2014 for financial accounting purpose. What accounts will be debited and credited to record the deletion?
2.) (a.) In 2013, 20,500 tons of ore were sold for $2,050,000. For tax purposes, operating expense of teh mine were $500,000. The taxpayer may deduct either cost depletion or percentage depletion, which for the type ore produced is 8 percent of production sold from the mine. (assume, however, the percentage depletion is limited to the amount of net income from the property). What would be the amount of percente depletion allowable in 2013?
(b.) What would be the amount of cost depletion allowable for tax purposes in 2013, assuming that capitalized mineral costs are the same for tax purposes as for financial accounting purposes?
(c.) What will the amount of depletion based on cost that the company could deduct on its tax return in 2014 it deducts percentage depletion in 2013?
(d.) Suppose that in the first three years of the mine’s life, the company took percentage depletion totaling $654,000.. In the fifth year of the mine’s life, production proceeds were $4,300,000. How much percentage depletion could the compan deduct in the fifth year?
Analyze: What explination do you think might be given for the deviation of income tax rules from basic accounting principles in the determination of depletion of costs of minerals?