Cost depletion example from your text scrap happy

Cost Depletion Example from Your Text
Scrap-Happy purchases a tract of forest land which they plan to use
to harvest trees for the production of scrapbook paper. It is
estimated that the tract contains 30,000 board feet of timber. The
original cost of the property is $75,000, of which $60,000 is
allocated to the timber and $15,000 to the land.
What is the cost depletion per board foot?
If the company uses 10,000 board feet during the first year, how
much will they expense under the cost depletion method?

Depletion
Percentage depletion :
• Deducted in the years of the sales ( gross revenue ) of the
product with the natural resource as a component of it.
• Limited to 50% of the amount of taxable income from the
natural resource business activity prior to considering the
depletion deduction.
• However, unlike cost depletion, this is not capped at the
actual total costs for production or extraction (can continue to
receive deductions based on the amount of revenue)
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Depletion
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Class Exercises

a. A local accounting firm purchased 5 new computers for its new
staff members for a total cost of $10,000 on January 1, 2016.
b. A construction company purchased new
furniture for its main office on August 25, 2015,
which cost $4,000 in total.
1(a) 1(b)

c. A landscaping firm purchased a new $30,000 Chevy S10 (a
light truck) for the business on October 5, 2013.
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1(c)

Residential Rental Property Mid-Month Convention
d. Maggie and Mike purchased a townhouse for $350,000 on
July 31, 2018, which they immediately rented out to a tenant.
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Straight Line – 27.5 Years

2. Part a: A manufacturing firm purchased machinery equipment on March 15, 2013 for
$250,000, which was the only property it purchased that year. The firm sells the equipment on
January 15, 2018. Assume the firm always opts out of Sec. 179 and bonus if available and uses a
calendar year tax period. How much total depreciation does the firm have for the machine in 2018?

Part b: Assume the same example as in Part a except that the equipment was purchased on
November 15, 2013. Does your answer for part a change? If so, what is the new amount of total
depreciation? If not, why doesn’t it change?
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