The Basic Formula to Calculate Depreciation is:

Depreciation amount = the remaining depreciable balance * the depreciation rate determined by the chosen method.

The Basic Formula is Adjusted Slightly for Each Depreciation Method:

•Straight-line Depreciation amount = Remaining Balance * (1/Years Remaining in Recovery Period)

•Declining balance Depreciation amount = Remaining Balance * (1/Years in Recovery Period)

•150% Declining balance Depreciation amount = Remaining Balance * (1.5/Years in Recovery Period)

•200% Declining balance Depreciation amount = Remaining Balance * (2/Years in Recovery Period)

•Annual percentage Depreciation amount = Remaining Balance * (Annual % Rate)

•Custom Table Depreciation amount = Remaining Balance * (Custom % Rate)

•Annual Unit of Production Depreciation amount = Remaining Balance * (This Years Production/All Remaining Production)

* Remaining balance =  the initial cost of the asset - the total of all prior years depreciation (for the first period, this will be the initial cost of the asset).

Straight-Line

The Straight-Line Depreciation Method will equally spread the cost of the investment over the recovery period.

Depreciation amount = (Initial cost of the asset - the total of all prior years depreciation) * (1/Years Remaining in Recovery Period)

Here is a sample for a $100,000 Investment with a 5-Year Recovery Period:

Declining Balance (100%, 150%, or 200%)

The Declining Balance Depreciation Method is an accelerated depreciation method. A set depreciation rate is applied against the remaining balance (unlike the Straight-Line method where the rate changes over time), which results in declining depreciation in successive years. With this method, you also have the option to "convert to Straight-Line." When that is chosen, the program will calculate the depreciation amounts for the Straight-Line and Declining Balance Methods, once the depreciation calculated with the Straight-Line Method is greater than or equal to the Declining Balance Method, it will switch over to the Straight-Line Method for the remaining years in the recovery period. The difference in the Declining Balance formulas (100%, 150% or 200%) is clearly seen as simply the adjustment to the rate.

Declining balance               Depreciation amount = Remaining Balance * (1/Years in Recovery Period)

150% Declining balance         Depreciation amount = Remaining Balance * (1.5/Years in Recovery Period)

200% Declining balance         Depreciation amount = Remaining Balance * (2/Years in Recovery Period)

Here is a sample of the 150% Declining Balance Method (that is converted to Straight-Line) for a $100,000 Investment with a 5-Year Recovery Period. You can see that in Year 3, the Straight-Line depreciation amount is greater, and it is "converted to Straight-Line."

Annual Percentage

This method takes the specified percentage and multiplies the remaining balance by that amount. For this method, you can specify the recovery period, or have the option to continue out the depreciation for the life of the well (until the economic limit), however long that may be.

With this method, you also have the option to "convert to Straight-Line." When that is chosen, the program will calculate the depreciation amounts for the Straight-Line and Annual Percentage methods, once the depreciation calculated with the Straight-Line Method is greater than or equal to the Declining Balance Method, it switches over to the Straight-Line Method for the remaining years in the recovery period. (THIS IS NOT BE IN THE EXAMPLE).

Depreciation amount = Remaining Balance * (Annual % Rate)

Here is a sample for a $100,000 Investment a 20% Annual Rate. We will assume it is depreciated 'for life' and this well has 10 years remaining:

Annual Unit of Production

This method of depreciation uses the current years production (in boe) divided by the remaining years production (in boe) to determine the rate of depreciation.

Depreciation amount = Remaining Balance * (This Years Production/All Remaining Production)

Here is a sample for a $100,000 investment depreciated 'for life' with 7 years remaining:

Conventions affect how  the depreciation is calculated for the year that the investment goes into service and the year it is disposed of. For example, if you put an investment into service November 13th, you may not want to calculate depreciation as if it were in use the entire year. You may use a 'mid-year' Convention that makes an adjustment and says, we can only claim half of this year's depreciation, since it was put into service during the second half of the year (November 13th falls in the second half of the calendar year). If you had the same investment, but used a 'mid-month' Convention, there would be one and a half months or 12.5% of the year left. Since the investment was put into place in November, we assume mid-month leaves a month and a half left for the year. Thus, you would take the full depreciation for the year and multiply it by 12.5% to get the depreciation for the first year.

In PHDwin, you can split the year in half, into quarters, or into months. To determine the proper depreciation for the first year, use the formula for the chosen method, and apply the first year percentage adjustment shown in the table below that reflects the Convention that you chose and the date that the investment was put into service.

For example, let's say you made a $1,000,000 investment that was put into service on April 12th. You are going to depreciate it using Annual Percentage (20%) depreciation with a mid-month Convention.

We know that the Annual percentage formula is:

Depreciation amount     = Remaining Balance * (Annual % Rate)

= $1,000,000 * .20

= 20,000

However, since we've chosen to the use the mid-month Convention, and this investment was not put into service until April 12th, we have to adjust it by the percentage below for the first year.

First Year Adjusted Depreciation Amount   = Depreciation amount * Convention Adjustment Rate

= $20,000 * .708

= $14,166