Depreciation Flashcards

1
Q

Define Depreciation

A

The process of systematically and rationally determining how much of a non-current asset’s initial cost is recognized as an expense in each year of its life

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2
Q

What can be depreciated?

A
  • If the asset is used in business or held for the production of income
  • The asset must have a determinable life that is longer than 1 year
  • Must wear out, decay, get used up, or lose value
  • It must be owned by YOU
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3
Q

So is land depreciable?

A

NO because it has no determined life and doesn’t wear out

BUT the building on the land is depreciable!!

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4
Q

Define Acquisition cost

A

Cost of the plant and equipment including all expenses reasonable and necessary in acquiring the asset and placing it into a position for business operation

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5
Q

Ryan bout an office building for $100,000. The property tax statement shows:
Improvement $60,000 75%
Land $20,000 25%
Total Value $80,000 100%
How much is the land value and depreciable value?

A

Land = 100,000* 25% = 25,000
100,000-25,000=75,000
So $75,000 is the acquisition cost for the building and is the depreciable amount.

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6
Q

Define Useful Life

A

Two determinants: physical deterioration and obsolescence

Based on: IRS guidelines, statutory law (patent), contract (lease), or utility (use)

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7
Q

Define Residual or salvage value

A

An estimate of what the asset will be worth at the end of its useful life, minus any costs of disposing of the asset

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8
Q

Define Straight-line Method

A

Assumes that depreciation will be at a constant rate throughout the estimated life

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9
Q

Define Accelerated methods

A

Declining-balance method or sum-of-the-years-digits methods

Generate depreciation expense which decreases from year-to-year, with larger amount in the first year

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10
Q

Define MACRS

A

Modified Accelerated Cost Recovery System

Used for income tax purposes

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11
Q

**Straight-Line Formula

A

Depreciation Expense = (Cost - Residual Value) x (1/years of useful life)

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12
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
Straight line depreciation
A

20000-2000*(1/4)= $4,500 per year
Divide by 12 to get the monthly depreciation
(1/4) DOESN’T change

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13
Q

Define Book Value/Carrying Value

A

The net amount at which an asset is shown in the accounting records
Calculated by subtracting the ACCUMULATED depreciation from the original cost
WILL NOT GO BELOW RESIDUAL VALUE

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14
Q

Why is Accelerated Methods used?

A

Decreased the current year’s tax burden by recognizing a relatively large amount of depreciation expense

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15
Q

Define Sum of years digits

A

If it has 3 years of depreciation it would be 3+2+1= 6

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16
Q

**Accelerated Methods Formula

A

Depreciation expense = (remaining years of useful life/sum of years) X (cost-residual)

17
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
First Year Accelerated Method Depreciation
A

(4/10)*(20000-2000) = 7200

$7,200 depreciation in year ONE

18
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
Second Year Accelerated Method Depreciation
A

(3/10)*18000= 5400

$5,400 depreciation in year TWO

19
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
Total depreciation after two years and book value of the truck?
A
5400+7200= 12600
$20,000-$12,600= $7,400

Total: $12,600
Book Value after year two: $7,400

20
Q

Define Double Declining Balance Depreciation

A

Early years = largest depreciation

Ignores residual value in calculation but still should not depreciate past the residual value

21
Q

**Double Declining Balance Depreciation Formula

A
2 X (straight line rate) X book value 
Where straight line rate = (1/years of usefulness)
22
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
Year 1 Depreciation using DDBD?
A

2 * (1/4) * 20000= 10000

$10,000 depreciation in year one

23
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
Year 2 Depreciation using DDBD?
A

2 * (1/4) * 10000 = 5000

$5,000 depreciation in year two

24
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
Total Depreciation after year two using DDBD and book value?
A

Total: 10000+5000= $15,000

Book value: 20000-15000= $5,000

25
Q

Define Depreciation for Partial Accounting Periods

A

Full month = on or before the 15th

No depreciation if it is after the 15th

26
Q
Delivery Truck
Acquisition Cost : $20,000
Residual Value: $2,000
Useful life: 4
2014 Depreciation using Straight line if bought on October 8th, 2014?
A

3 months
(20000-2000)*(1/4) = $4500 per year

$4500 * 12 months = $375 per month

$375 * 3 months = $1125 in year one