ala water under his farm. On the basis of this report Timmy, on your advice, allocated $6 million of his $20 million purchase price to the water. At the very beginning of Year 2 the hydrologist came bac
At the beginning of Year 1 Timmy purchased a 200-acre farm in Oldham County, Texas. He immediately proceeded to begin growing crops for sale. He irrigates his crops using water from the Ogallala formation.
At the time of purchase, Timmy was advised by a qualified hydrologist that there were approximately 200,000,000 cubic meters of recoverable Ogallala water under his farm. On the basis of this report Timmy, on your advice, allocated $6 million of his $20 million purchase price to the water.
At the very beginning of Year 2 the hydrologist came back and estimated that as of that time there remained 194,000,000 cubic meters of recoverable water under Timmy’s farm. Calculate and explain Timmy’s Year 1 cost depletion deduction.
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