Depreciation - also called Amortization
Example 1:
Rental Company
New Car: $30,000
Keep two years, expect to sell for $27,000
Depreciation:
30,000 – 27,000
=
$1500 / year
2 years
Example 2:
Spire Energy
Drill a gas well for $1,000,000
Expect it to produce for 10 years and it is then worth nothing.
Annual Depletion:
$1,000,000
=$100,000 / year
10 years
Example 3:
Spire Energy
The well is producing too much water after 6 years and becomes unviable
(worthless).
Book Value of Well:
$1,000,000 – 6 x $100,000 = $400,000
Income statement records a $400,000 write down (loss) for that well under
Other Income.
Example 4:
On the Simpson’s Mr. Burn’s builds a Nuclear Power Plant for
$200,000,000. He expects it to last 20 years after which he expects to
require $30,000,000 to clean up the site. Annual depreciation and
environmental allowances would be:
$200 – ($30)
=
$11.5 million / year
20 years
Example 5:
On the Simpson’s, after 15 years Mr. Burns was able to sell the Nuclear
Power Plant to the German investment cartel for $100,000,000.
The book value of the plant would be:
$200 – 15 * 11.5 =
$27 million
He would report a gain (profit) of $73,000,000 on the transaction. This
appears on the line Other Income.