Sam Jones owns a granite stone quarry. When he acquired the land, Sam allocated $800,000 of the purchase price to the quarry's recoverable mineral reserves, which were estimated at 10 million tons of granite stone. Based on these estimates, the cost depletion was $0.08 per ton. In April of the current year, Sam received a letter from the State Department of Highways notifying him that part of his property was being condemned so that the state could build a new road. At that time, the recoverable mineral reserves had an adjusted basis of $600,000 and 7.5 million tons of granite rock. Sam estimates that the land being condemned contains about 2 million tons of granite. Therefore, for the current year, Sam has computed his cost depletion at $0.11 per ton [$600,000 ÷ (7,500,000 – 2,000,000)].
a. Is it proper for Sam to recompute a new cost depletion amount based on a revised estimate of the tons of granite stone remaining in the quarry?
YesNo
b. Sam should
increasereduce
the recoverable mineral reserves adjusted basis for the portion of the
basisdepletion expenseloss
allocable to the condemned land.
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