Exam2_ININ_Depreciation Flashcards
Expenses
subtract from revenues as they occur
Labor
Utilities
Materials, etc.
What is depreciation?
Depreciation is the systematic allocation of an asset’s cost over its useful life due to wear, deterioration, or obsolescence.
Decline in market value of an asset due to
deterioration or obsolescence
Decline in value of an asset to its owner
Name the four main valuation methods allowed by GAAP.
Straight-line, Declining Balance, Units of Production, Sum-of-Years’ Digits.
What is the purpose of depreciation for taxes?
To reduce taxable income by expensing the cost of assets over time.
Define ‘Bonus Depreciation.’
Bonus depreciation allows immediate expensing of a percentage of an asset’s cost, sometimes up to 100%.
What does MACRS stand for?
Modified Accelerated Cost Recovery System.
When can a property be depreciated?
When it is used for business, has a determinable useful life longer than one year, and gradually loses value.
What types of property are generally depreciable?
Almost all tangible property except land, factory inventory, and leased property.
What is the formula for Straight-Line (SL) Depreciation?
d_t = (B - S) / N, where B = cost, S = salvage value, N = depreciable life.
How does Double Declining Balance (DDB) depreciation work?
DDB depreciates the book value at twice the straight-line rate, without considering salvage value until switching to SL if beneficial.
What is the purpose of switching from DDB to SL depreciation?
To maximize the present worth of depreciation charges.
Describe ‘Depreciation Recapture.’
If an asset is sold above its book value but below its original cost, the excess is recaptured as ordinary income.
What is the General Depreciation System (GDS) under MACRS?
A system that uses declining balance, converting to straight-line, based on property class lives and a zero salvage value.
What are MACRS property class lives?
Ranges from 3-year property for short-lived assets to 39-year property for nonresidential real estate.
Explain ‘Depletion’ in the context of natural resources.
Depletion is the reduction in value due to resource extraction, calculated using cost or percentage methods.
