DEPRECIATION
McGraw-Hill/Irwin
Chapter Fourteen
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
LEARNING UNIT OBJECTIVES
LU 14-1: Concepts of Depreciation and the Straight-Line Method
1.
Explain the concept and causes of depreciation.
2.
Prepare a depreciation schedule and calculate partial-year depreciation.
LU 14-2: Units-of-Production Method
1.
Explain how use affects the units-of-production method.
Prepare a depreciation schedule.
LU 14-3: Declining-Balance Method
2.
1.
Explain the importance of residual value in the depreciation schedule.
2.
Prepare a depreciation schedule.
LU 14-4: Modified Accelerated Cost Recovery System (MACRS) with
Introduction to ACRS (1986, 1989, 2010)
1.
Explain the goals of ACRS and MACRS and their limitations.
2.
Calculate depreciation using the MACRS guidelines.
14-2
CONCEPT OF DEPRECIATION
Depreciation –
Asset Cost –
An estimate of the use or
deterioration of an asset
Amount paid for an asset including
freight charges
Estimated Useful Life –
Number of years or time periods
for which the company can use
the asset
Residual Value (Salvage Value) Expected cash value at the end of
an asset’s useful life.
14-3
CONCEPT OF DEPRECIATION
Accumulated Depreciation – The total amount of the asset’s depreciation taken to date.
Book Value - The unused amount of the asset cost that may be depreciated in future
accounting periods.
Book value = Asset cost -- Accumulated book value
Book value cannot be less than residual value.
14-4
CAUSES OF DEPRECIATION
Product Obsolescence
Physical Deterioration
14-5
STRAIGHT-LINE METHOD
Distributes the same amount of expense to each period of time.
Depreciation expense
each year
=
Cost -- Residual value
Estimated useful life in years
Example:
Ajax Company bought equipment for $2,500. The company estimates that
the equipment’s period of useful life will be 5 years. After 5 years the
residual value is $500. Calculate depreciation expense and complete a
depreciation schedule.
($2,500 -- $500)
5
= $400
100% = 100% = 20%
# of yrs.
5
14-6
DEPRECIATION SCHEDULE
14-7
DEPRECIATION FOR PARTIAL YEARS
15th Rule: If a company buys an asset before the 15th of the
month, the company calculates the asset’s depreciation for
a full month.
15th
Rule
Assume Ajax Company bought equipment on May 6. The cost is
$2,500 with an estimated useful life of 5 years. The residual
value is $500. What would be depreciation for the first year?
$2,500 -- $500 = $400 x 8 = $266.67
12
5
May, June, July,
Aug, Sept., Oct.,
Nov., & Dec.
14-8
UNITS-OF-PRODUCTION METHOD
Depreciation determined by how much the company uses the asset.
Depreciation expense =
Cost -- Residual value
= ($2,500 -- $500) = $.50
4000
per unit
Total estimated units produced
Depreciation =
amount
Unit
x
depreciation
Units
produced
Example:
Ajax Company (in Learning Unit 14–1) buys equipment ($2,500), and 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.
14-9
DEPRECIATION SCHEDULE
14-10
DECLINING-BALANCE METHOD
Accelerated method which computes more depreciation expense in the early
years of the asset’s life. Uses up to twice the straight-line rate.
Rate = 100% x 2 = 40%
5 years
Depreciation expense =
each year
Book value of equipment x Depreciation
at beginning of year
rate
Example:
Ajax Company (in Learning Unit 14–1) buys equipment ($2,500), and 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.
14-11
DEPRECIATION SCHEDULE
14-12
MODIFIED ACCELERATED COST
RECOVERY SYSTEM (MACRS)
• Federal tax laws state how depreciation must be taken for income tax purposes.
• Provides users with tables giving the useful lives of various assets and the
depreciation rates.
14-13
KEY POINTS OF MACRS
1. It calculates depreciation for tax purposes.
2. It ignores residual value.
3. Depreciation in 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 14.5 builds this into the calculation.
5. Classes 15 and 20 use a 150% declining-balance method before switching to straightline depreciation.
6. Classes 27.5 and 31.5 use straight-line depreciation.
14-14
MODIFIED ACCELERATED COST RECOVERY
SYSTEM (MACRS) (TABLE 14.4)
14-15
ANNUAL RECOVERY FOR MACRS
(TABLE 14.5)
Recovery 3-year class
year
(200% D.B.)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
33.00
45.00
15.00
7.00
5-year class
(200% D.B.)
7-year class
(200% D.B.)
10-year class
(200% D.B.)
15-year class
(150% D.B.)
20-year class
(150% D.B.)
20.00
32.00
19.20
11.52
11.52
5.76
14.28
24.49
17.49
12.49
8.93
8.93
8.93
4.46
10.00
18.00
14.40
11.52
9.22
7.37
6.55
6.55
6.55
6.55
3.29
5.00
9.50
8.55
7.69
6.93
6.23
5.90
5.90
5.90
5.90
5.90
5.90
5.90
5.90
5.90
3.00
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
14-16
DEPRECIATION SCHEDULE
14-17