Depreciation Flashcards
Define Depreciation
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
What can be depreciated?
- 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
So is land depreciable?
NO because it has no determined life and doesn’t wear out
BUT the building on the land is depreciable!!
Define Acquisition cost
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
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?
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.
Define Useful Life
Two determinants: physical deterioration and obsolescence
Based on: IRS guidelines, statutory law (patent), contract (lease), or utility (use)
Define Residual or salvage value
An estimate of what the asset will be worth at the end of its useful life, minus any costs of disposing of the asset
Define Straight-line Method
Assumes that depreciation will be at a constant rate throughout the estimated life
Define Accelerated methods
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
Define MACRS
Modified Accelerated Cost Recovery System
Used for income tax purposes
**Straight-Line Formula
Depreciation Expense = (Cost - Residual Value) x (1/years of useful life)
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 Straight line depreciation
20000-2000*(1/4)= $4,500 per year
Divide by 12 to get the monthly depreciation
(1/4) DOESN’T change
Define Book Value/Carrying Value
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
Why is Accelerated Methods used?
Decreased the current year’s tax burden by recognizing a relatively large amount of depreciation expense
Define Sum of years digits
If it has 3 years of depreciation it would be 3+2+1= 6
**Accelerated Methods Formula
Depreciation expense = (remaining years of useful life/sum of years) X (cost-residual)
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 First Year Accelerated Method Depreciation
(4/10)*(20000-2000) = 7200
$7,200 depreciation in year ONE
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 Second Year Accelerated Method Depreciation
(3/10)*18000= 5400
$5,400 depreciation in year TWO
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 Total depreciation after two years and book value of the truck?
5400+7200= 12600 $20,000-$12,600= $7,400
Total: $12,600
Book Value after year two: $7,400
Define Double Declining Balance Depreciation
Early years = largest depreciation
Ignores residual value in calculation but still should not depreciate past the residual value
**Double Declining Balance Depreciation Formula
2 X (straight line rate) X book value Where straight line rate = (1/years of usefulness)
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 Year 1 Depreciation using DDBD?
2 * (1/4) * 20000= 10000
$10,000 depreciation in year one
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 Year 2 Depreciation using DDBD?
2 * (1/4) * 10000 = 5000
$5,000 depreciation in year two
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 Total Depreciation after year two using DDBD and book value?
Total: 10000+5000= $15,000
Book value: 20000-15000= $5,000
Define Depreciation for Partial Accounting Periods
Full month = on or before the 15th
No depreciation if it is after the 15th
Delivery Truck Acquisition Cost : $20,000 Residual Value: $2,000 Useful life: 4 2014 Depreciation using Straight line if bought on October 8th, 2014?
3 months
(20000-2000)*(1/4) = $4500 per year
$4500 * 12 months = $375 per month
$375 * 3 months = $1125 in year one
