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 = 2 years $1500 / year
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) = 20 years $11.5 million / year
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.