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Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion deduction for the current year?

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Answer:

The cost of depletion in the current year is $90,000

Explanation:

Santa Fe's current year cost of depletion=cost of rights*Turquoise extracted in the current year/total estimated turquoise to be extracted

cost of rights is $300,000

turquoise extracted in the current year is 1,500 pounds

total estimated turquoise to be extracted over a five-year period is 5000 pounds

cost of depletion in the current year=$300,000*1500/5000

                                                           =$ 90,000.00  

By extension profit for the year assuming no other costs were incurred is :

$200,000-$90,000=$110,000

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