What are the two primary methods of calculating depletion?

What are the two primary methods of calculating depletion?

• A. Market value method, cost depletion method
• B. Cost depletion method, yardstick method
• C. Cost depletion method, percentage depletion method
• D. Percentage depletion method, gross income method

Answer: (C)

The two primary methods of calculating depletion in the oil and gas industry are indeed the cost depletion method and the percentage depletion method. The cost depletion method is based on the actual costs incurred in the acquisition and development of the resource. It allows companies to deduct the actual investment made in the resource as it is extracted, which means that as more of the resource is removed, a portion of that cost is recognized as an expense against income. This method provides a direct correlation between the amount of resource extracted and the costs incurred, which can be beneficial for accurate financial reporting. On the other hand, the percentage depletion method is a statutory allowance that permits companies to deduct a fixed percentage of gross income from the extraction of the resource, regardless of the original cost. This method can be advantageous for companies with significant natural resource revenues, as it often allows for a greater deduction than cost depletion, particularly in times of high market prices. The other options do not represent the primary methods for calculating depletion in oil and gas tax practice. For example, the yardstick method and gross income method are not recognized as standard approaches within this context. The market value method, while it may come into play in certain situations, does not serve as a primary method for depletion calculation in the

The two primary methods of calculating depletion in the oil and gas industry are indeed the cost depletion method and the percentage depletion method.

The cost depletion method is based on the actual costs incurred in the acquisition and development of the resource. It allows companies to deduct the actual investment made in the resource as it is extracted, which means that as more of the resource is removed, a portion of that cost is recognized as an expense against income. This method provides a direct correlation between the amount of resource extracted and the costs incurred, which can be beneficial for accurate financial reporting.

On the other hand, the percentage depletion method is a statutory allowance that permits companies to deduct a fixed percentage of gross income from the extraction of the resource, regardless of the original cost. This method can be advantageous for companies with significant natural resource revenues, as it often allows for a greater deduction than cost depletion, particularly in times of high market prices.

The other options do not represent the primary methods for calculating depletion in oil and gas tax practice. For example, the yardstick method and gross income method are not recognized as standard approaches within this context. The market value method, while it may come into play in certain situations, does not serve as a primary method for depletion calculation in the