Kinh tế học - Chapter 17: Depreciation

Chapter 17DepreciationExplain the concept and causes of depreciationPrepare a depreciation schedule and calculate partial-year depreciationDepreciation#17Learning Unit ObjectivesConcepts of Depreciation and the Straight-Line MethodLU17.1Explain how use affects the units-of-production methodPrepare a depreciation scheduleDepreciation#17Learning Unit ObjectivesUnits-of-Production MethodLU17.2Explain the importance of residual value in the depreciation schedulePrepare a depreciation scheduleDepreciation#17Learning Unit ObjectivesDeclining-Balance MethodLU17.3Explain the goals of ACRS and MACRS and their limitationsCalculate depreciation using the MACRS guidelinesDepreciation#17Learning Unit ObjectivesModified Accelerated Cost Recovery System (MACRS) with Introduction to ACRSLU17.4Estimated Useful Life - Number of years or time periods for which the company can be use the assetDepreciation - An estimate of the use or deterioration of an assetAsset Cost - Amount paid for an asset including freight chargesConcept of DepreciationAccumulated Depreciation - The total amount of the asset’s depreciation taken to dateResidual Value (Salvage Value) - Expected cash value at the end of an assets useful life.Concept of DepreciationBook Value - The unused amount of the asset cost that may be depreciated in future accounting periodsBook Value = Asset cost - Accumulated Book valueBook value cannot be less than residual valueCauses of DepreciationProduct ObsolescencePhysical DeteriorationStraight-Line MethodDistributes the same amount of expense to each period of timeDepreciation expense = Cost - Residual value each year Estimated useful life in yearsAjax Company buys equipment, the company estimates how many units the equipment can produce. Let’s assume the equipment has a useful life of 4,000 units. After 5 years the residual value is $500. Calculate depreciation expense and complete a depreciation schedule.$2,500 - $500 = $400 5 100% = 100% = 20%# of yrs. 5Depreciation Schedule Book value at end Depreciation Accumulated of year (Cost -End of Cost of expense for depreciation Accumulatedyear equipment year at end of year depreciation)1 $2,500 $400 $ 400 $2,1002 $2,500 $400 $ 800 $1,7003 $2,500 $400 $1,200 $1,3004 $2,500 $400 $1,600 $ 9005 $2,500 $400 $2,000 $ 500EqualsResidualValueDepreciation for Partial YearsAssume Ajax Company bought equipment for $2,500. What would be depreciation for the first year? The estimated useful life is five years.Depreciation expense = Cost - Residual value each year Estimated useful life in years$2,500 - $500 = $400 x 8 = $266.67 5 1215thRuleMay, June, July, Aug, Sept., Oct., Nov., & Dec.Units-of-Production MethodDepreciation determined by how much the company uses the assetDepreciation expense = Cost - Residual value per unit Total estimated units producedAjax Company (in Learning Unit 17–1) buys equipment, the company estimates how many units the equipment can produce. Let’s assume the equipment has a useful life of 4,000 units. After 5 years the residual value is $500. Calculate depreciation expense and complete a depreciation schedule.Depreciation = Unit x Units amount depreciation producedDepreciation Schedule Depreciation Accumulated Book valueEnd of Cost of Units expense for depreciation at endyear equipment prod. year at end of year of year1 $2,500 300 $150 $ 150 $2,3502 $2,500 400 $200 $ 350 $2,1503 $2,500 600 $300 $ 650 $1,8504 $2,500 2,000 $1,000 $1,650 $ 8505 $2,500 700 $350 $2,000 $ 500 $2,500 - $500 = $.50 per unit 4,000 400 x $.50Rate = 100% x 2 = 40% 5 yearsAjax Company (in Learning Unit 17–1) buys equipment, the company estimates how many units the equipment can produce. Let’s assume the equipment has a useful life of 4,000 units. After 5 years the residual value is $500. Calculate depreciation expense and complete a depreciation schedule.Depreciation expense = Book value of equip. x Depreciation each year at beginning of year rateAccelerated method which computes more depreciation expense in the early years of the asset’s life. Uses up to twice the straight-line rateDeclining-Balance MethodDepreciation Schedule Accumulated Book value at Depreciation Accumulated Book valueEnd of Cost of depreciation beginning expense for depreciation at endyear Truck at beg. of year of year year at end of year of year1 $2,500 0 $2,500 $1,000 $1,000 $1,5002 $2,500 $1,000 $1,500 $ 600 $1,600 $ 9003 $2,500 $1,600 $ 900 $ 360 $1,960 $ 5404 $2,500 $1,960 $ 540 $ 40 $2,000 $ 5005 $2,500 $2,000 $ 500 $ 0 $2,000 $ 500 $1,500 x .40Rate = 100% x 2 = 40% 5 yearsModified Accelerated Cost Recovery System (MACRS) with Introduction to (ACRS)Federal tax laws state how depreciation must be taken for income tax purposesProvides users with tables giving the useful lives of various assets and the depreciation ratesKey points of MACRS1. It calculates depreciation for tax purposes.2. It ignores residual value.3. Depreciation if the first year (for personal property) is based on the assumption that the asset was purchased halfway through the year. (A new law adds a midquarter convention for all personal property if more than 40% is placed in service during the last 3 months of the taxable year.)4. Classes 3,5,7, and 10 use a 200% declining-balance method for a period of years before switching to straight-line depreciation. You do not have to determine the year in which to switch since Table 17.6 builds this into the calculation. 5. Classes 15 and 20 use a 150% declining-balance method before switching to straight-line depreciation.6. Classes 27.5 and 31.5 use straight-line depreciation.Table 17.4 - Modified Accelerated Cost Recovery System (MACRS) Class recoveryPeriod (life) Asset types 3-year Racehorses more than 2 years old or any horse other than a racehorse that is more than 12 years old at the time place into service special tools of certain industries. 5-year Automobiles (not luxury) taxis; light general purpose trucks; semiconductor manufacturing equipment computer-based telephone central-office switching equipment qualified technological equipment; property used in connection with research and experimentation. 7-year Railroad track single-purpose agricultural (pigpens), or horticultural; structures; fixtures; equipment; furniture. 10-year New law doesn’t add any specific property under this class. 15-year Municipal wastewater treatment plants; telephone distribution plants and comparable equipment used for two-way exchange of voice and data communications. 20-year Municipal sewers. 27.5-year Only residential property. 31.5-year Only nonresidential real property.Table 17.5 - Annual Recovery for MACRSDepreciation Schedule Depreciation Accumulated Book valueEnd of Cost of expense for depreciation at endyear equipment year at end of year of year 1 $2,500 $500 $500 $2,000 ($2,500 x .20)2 $2,500 $800 $1300 $1,200 ($2,500 x .32)3 $2,500 $480 $1,780 $ 7204 $2,500 $288 $2,068 $ 4325 $2,500 $288 $2,356 $ 1446 $2,500 $144 $2,500 $ 0