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(a) (Surges for amortization of defense facilities wares 1942-17,342, 1943-$17,920, 1944-$36,802, 1945-^^418, total $160,482. Detailed description of such facilities is shown in Exhibit 1-11, Schedule 4 of Consolidated Federal in cone tax return for Tear 1945 far Union Pacific Railroad Ccnpany and if filiated Companies* Inclusion of such charges in the accounts resulted in the Water Department showing an aggregate net loss before income taxes far years shown above of $54*627, as shown in separate statement of Water Department operations for the years 1929 to 1948, inclusive. For this reason, and since the facilities Ire all still in service, it seems only equitable that amortization should be disregarded and depreciation substituted therefor and spread over the life of the facilities* Estimated annual depreciation on the facilities is computed at $2,311 based on the following rates* 2% on 2" to 4" lines, 1*54$ on 6" lines, l-l/3$ on 8* to 10" lines, and 1% on 12* lines (rates fixed for income tax purposes for other pipe lines of the Water Company). Where more than one size of pipe was included in one AFE, the cost shown in the AFE was apportioned between the various sizes based on the relative quantities (diameter multiplied by length) of each size* (b) Represents the excess of (1) Water Co. proportion (percentage of water used by Water Co. of total water used, as shown in annual reports to The Public Service Commission of Nevada) of 6$ on average of net investment of Railroad at beginning and end of each year (average gross investment less estimated depreciation thereon) after allowing for Federal income taxes at the rate of 38$, over (2) Water Co. proportion of 6$ on average of gross investment of Railroad at beginning and end of each year: ($765,999 - $195,701) 1947 - * 6251 = $48,071 1948 - 1949 - 87.156 87.156 91.356 91.356 96.356 96.356 $765,999 ($769,978 - $224,974) t 6256 $769,978 _______ ($784,231 - $254,774) * 6256 - $$784,231 *JB4a8f,f1l5t3t $8,040 4 2 ,1 8 0 *49,342 5,973 45.313 4,029 Investment figures of Railroad as of Dec. 31, 1929 to 1948, inclusive, and depreciation figures for years 1939 to 1948, inclusive, were furnished by General Auditor, and depreciation for years prior to 1939 was computed at the average rate for that year (3 .456) and for 1949 was computed at the average rate for 1948 (3.856). Investment as of Dec. 31, 1949 was estimated by adding expendi-tures($ 22,l6l) shown on LA&SL Carry-over as of Dec. 31, 1949 under A.F.E. No. 1 to the investment as of Dec. 31, 1948. (e) Federal income taxes were estimated on the basis of operations being conducted by a separate corporation, and carrying the loss for 1947 over to 1948. (d) Represents average of gross investment of Water Co. at beginning and end of each year (Account 101 in balance sheet included in annual reports to the Public Service Commission of Nevada) less average of retirement reserves at beginning and end of each year (Account 251 in balance sheet) adjusted to substitute depreciation for amortization on emergency facilities referred to above, and less average of donations subject to complete or partial refund at beginning and end of each year* tdu 1947 - Average of investment at beginning and end of year . . $476,314 Less (1) $216,575 - (2) $150,188) + (3) $66,029 . . . 132.416 $343,898 1948 - Average of Investment at beginning and end of year . . $528,042 Less (1) $221,301 - (2) $147,877) + (3) $95,458 . . . 168.883 359,159 1949 - Average of investment at beginning and end of year . . $630,714 Less (1) $227,380 - (2) $145,566) + (3) $157,584 . . . 239.398 391,316 (1) Average of retirement reserves at beginning and end of year. (2) Amount by which reserves would be reduoed to date if depreciation were substituted for amortization. (3) Average of donations subject to complete or partial refund at ^ beginning and end of year. Hints 656 on average net investment of Water Co. divided by 77.3$ (difference between 100$ -Which is arbitrarily assumed to be average Federal income tax rate for this company's rations). Hew York, April 4, 1950. L . J. T a