MASTERING DEPRECIATION
INSTRUCTOR’S LECTURE OUTLINE
This lecture outline follows the 8 sections of the workbook, Mastering Depreciation.
Section 1: General differences between book and tax depreciation
Section 2: GAAP depreciation
Sections 3–6: The four GAAP methods: straight-line, units of production, declining balance
and sum-of-the-years’-digits
Section 7: MACRS depreciation for PP&E
Section 8: Tax depreciation of passenger cars and other vehicles.
Lecture notes format
The lecture notes for each section of the workbook are divided into four to five parts:

Workbook section covered. The section number and title of the workbook covered.

PowerPoint slides. The numbers of the slides used to cover this section of the
workbook. Note: Because the PowerPoint presentation includes animation to
enhance learning, it is designed to be shown in “Slide Presentation” mode. When the
slideset is shown in Slide Presentation, the numbers on the sides will not appear.

Topics covered. An outline of the topics covered in the PowerPoint slide presentation.
These can also be used if you choose to print handouts using PowerPoint’s Handout
Master. Where appropriate, slide numbers are given for specific topics.

Key teaching points. These appear only in those sections where in-class experience
has shown the need to emphasize some point.

Optional points of emphasis. Topics that generally should be stressed, depending on
the makeup of your class.

In-class activities. Suggested selections from the Homework Exercises portion of the
teaching guide to work through in class. There are enough Homework Exercises for
both in-class activities and homework assignments.
© American Institute of Professional Bookkeepers, 2010
Instructor’s Lecture Outline
1
Mastering Depreciation
Section 1DEPRECIATION ON THE FINANCIAL STATEMENTS V. TAX RETURN
(Slides 2–5)
Topics covered
 PP&E and its major categories, the concept of depreciation, the depreciation AJE
and “book value.”

General differences between GAAP and tax depreciation.

Why some companies use tax depreciation for tax and book purposes.
Optional points of emphasis
 When you present book value (Slide 4), consider noting that plant assets are
reported on the balance sheet at net (book value).
In-class activities
Choose among Homework Exercises for Section 1, Problems2, 3 and 4.
Instructor’s Lecture Outline
2
Mastering Depreciation
Section 2DEPRECIATION UNDER GAAP (FOR BOOK PURPOSES)
(Slides 6–27)
Topics covered
 The four components used to calculate depreciation.

Expenditures included in the total cost (basis) of various assets (Slides 7–21):
 land;
 land improvements;
 buildings; and
 equipment or machinery.

Residual value is also called salvage value, scrap value, or trade-in value.

Computing original cost case examples:
 purchase of land
 purchase of equipment

Journal entries for purchase of an asset:
 purchase for cash
 purchase for debt (note payable)

Group purchases: Case example of computing cost basis for the purchase of a beauty
shop and underlying land.

Focus on the residual value and useful life of a plant asset (Slides 22–26).

The four GAAP depreciation methods. (Slide 27)
Key teaching points
 Spend time on the expenditures included in original cost. The goal: To make sure
students do not struggle to remember what cost includes each time they learn a new
depreciation method.

For group purchases, make sure students understand the importance of costing out
each asset’s basis in order to depreciate it. Homework Exercises 8–9 are on group
purchases.
Optional points of emphasis
 Book value (cost  accumulated depreciation) can never go below residual value.
This will be important in declining balance depreciation.

Useful life in units: Ask students how “units” would be measured for a machine v.
automobile.

For land improvements (Slide 9), emphasize the difference between land and
improvements to land—land is not depreciated, but improvements are.
In-class activities
 The four components used to calculate depreciation—Homework Exercises for
Section 2, Problem 5.

Improvements to land— Homework Exercises for Section 2, Problem 6.
Instructor’s Lecture Outline
3
Mastering Depreciation
Section 3THE STRAIGHT-LINE (SL) METHOD OF DEPRECIATION
(Slides 28–43)
Topics covered
 The two SL formulas, one computing annual depreciation expense, the other the
annual depreciation rate. In the expense formula, point out how the numerator is
the depreciable base.

Introduce partial-year depreciation under the SL method and how depreciation is
prorated with an example (Slides 31–33).

The depreciation schedule by column and row.
Key teaching points
 Under GAAP, depreciation begins when an asset has been acquired and placed in service.
To avoid cumbersome, repetitious language explain that when you say “purchase” it is
assumed that the asset is placed in service at the same time.

Although the examples in the slides use the depreciation expense formula, spend
time on the SL rate formula. It will be important in the declining balance method.

GAAP allows any reasonable method as long as it is consistently applied.
Optional points of emphasis
 Using the depreciable base as the numerator in the straight-line formula ensures
that book value will equal residual value at the end of the asset’s useful life.


When explaining the depreciation schedule, remind students that on the
depreciation schedule:

the column headings are the four components of the computation Cost 
Residual value = Depreciable base

Residual value + Depreciable base must equal asset cost.
Accumulated depreciation reduces the book value of the asset.
In-class activities
 How to do full-year depreciation— Homework Exercises for Section 3, Problems 1–2;
from workbook Section 3, Quiz 1, Problems III or IV (page 45), or Quiz 2, Problem III
(page 51).

How to do partial-year depreciation— Homework Exercises for Section 3, Problems
3–5; from workbook Section 3, Quiz 1, Problem II (page 45), and Quiz 2, Problems IV
and V (page 51).
Instructor’s Lecture Outline
4
Mastering Depreciation
Section 4THE UNITS OF PRODUCTION (UOP) METHOD OF DEPRECIATION
(Slides 44–50)
Topics covered
 In UOP depreciation, the numerator is the depreciable base—the denominator,
useful life in units, not years. Explanation of the computation (Slides 44–50).

An example of a delivery van and miles driven is followed by a sample schedule of a
delivery van and cartons hauled.
Key teaching point
 Because UOP is based on production, depreciation is not prorated in the year of
acquisition (Slide 49).
In-class activities
 UOP depreciation—any Homework Exercise problems for Section 4; workbook
Section 4, Quiz 1, Problems II, III, IV and V (page 74), or Quiz 2, Problems II, III,
IV and V (pages 82–83).
Instructor’s Lecture Outline
5
Mastering Depreciation
Section 5THE DECLINING BALANCE (DB) METHOD OF DEPRECIATION
(Slides 51–59)
Topics covered
 Explanation of DB starts with SL. Example and schedule (Slides 44–60).

150% DB v. DDB (200%) depreciation.

How to compute partial Year 1 v. Year 2 depreciation.
Optional points of emphasis
 Although most depreciation methods use the depreciable base to compute depreciation,
DB uses book value—thus, final year depreciation must be “plugged” to ensure that
book value equals residual value.
In-class activities
 Full-year DDB, Homework Exercises for Section 5, Problems 1–2.

Partial-year DDB, Homework Exercises for Section 5, Problems 3–5.
Instructor’s Lecture Outline
6
Mastering Depreciation
Section 6SUM-OF-THE-YEARS’-DIGITS (SYD) METHOD OF DEPRECIATION
(Slides 60–65)
Topics covered
 SYD, the last GAAP method, is, like DB, an accelerated method. However, unlike
the DB, SYD method multiplies the depreciation rate by the depreciable base.

For assets acquired during the year, you must allocate depreciation every year of the
asset’s useful life. This cumbersome allocation is demonstrated.
Key teaching points
 Spend time on the fractions. The numerator is the remaining useful life at the
beginning of the year.

The denominator is the sum-of-the-years’ digits ([(n  (n + 1)]/2). There is an
example of Year 1 and Year 2 calculations.
Optional points of emphasis
 As you describe the numerator, remind students that the denominator is the sum-ofthe-years’ digits. Fully depreciating the depreciable base uses the numerator from
each digit each year, starting with the largest digit.
In-class activities
 Full-year calculations— Homework Exercises for Section 6, Problems 1–2;
workbook Section 6, Quiz 1, Problems II and III (page 134), and Quiz 2, Problems
II and IV (page 139).

Partial year calculations— Homework Exercises for Section 6, Problems 3–5;
workbook Section 6, Quiz 1, Problem IV (page 134), and Quiz 2, Problem III (page
139).
Instructor’s Lecture Outline
7
Mastering Depreciation
Section 7DEPRECIATION UNDER FEDERAL INCOME TAX DEPRECIATION RULES
(Slides 66–86)
Topics covered
 Tax v. book depreciation (Slides 66–67).

Tax depreciation of buildings—residential v. commercial (Slide 68).

How to use the residential property depreciation tables (Slide 69)

Example (Slides 70–71).

How to use the nonresidential (commercial) property depreciation tables (Slide 72)

Tax rules for plant and equipment and the mid-quarter convention (Slide 73).

Mid-quarter convention example (Slides 74–75).

Tax depreciation of plant and equipment (Slide 76)

How to use IRS tables for 5- and 7-year equipment (Slide 77).


Examples (Slides 78–79).
Bonus depreciation (Slide 80):
 Example: Bonus taken (Slide 81)
 Example: Bonus not taken (Slide 82)

Section 179 deductions on new and used property (Slide 83)

Examples (Slides 8486).
Optional points of emphasis
 Before starting the class on this section, consider copying and handing out IRS tables
for residential and nonresidential property, machinery and equipment (MACRS).

GAAP is based on useful life—MACRS, on recovery period. The company estimates
useful life, the IRS assigns the recovery period (useful life is irrelevant).

Section 179 expensing plus bonus depreciation provides a large tax deduction in the
first year. The goal: To spur investments in plant and equipment by improving cash
flow for companies across the country.
In-class activities
 How to use IRS tax tables for real-estate. Homework Exercises for Section 7,
Problems 6, 7 and 8.

Bonus depreciation, Homework Exercises for Section 7, Problems 1–2.

Bonus not taken, Homework Exercises for Section 7, Problem 3.

Sec. 179 and bonus taken, Homework Exercises for Section 7, Problems 4–5.
Instructor’s Lecture Outline
8
Mastering Depreciation
Section 8TAX DEPRECIATION OF VEHICLES
(Slides 87–102)
Topics covered
 Special rules for vehicles: passenger autos v. heavy SUVs, pickups and vans (Slide 87)

New passenger autos—IRS limits v. MACRS (Slides 88–93).

Used passenger autos—IRS limits v. MACRS (Slides 94–99)

Nonbusiness use of company vehicles: corporations v. sole proprietorships (Slide 100)
 Example: Corporate employee nonbusiness use (Slide 101)
 Example: Sole proprietor nonbusiness use (Slide 102)
Optional points of emphasis

Consider going into detail on passenger vehicles not subject to limits with the
following details from the workbook:

Heavy SUVs, pickups, and vans with an unloaded gross vehicle weight exceeding
6,000 pounds

Specially modified light SUVs, pickups, and vans that weigh 6,000 pounds or less
and are specially modified in a way to make personal use de minimus, such as
seating only a driver and one passenger

Ambulances

Hearses

Taxis (“vehicles used in the trade or business of transporting people for pay or hire”)

Delivery vehicles (“vehicles used in the business of transporting property for pay or
hire”) and trucks that are not designed to carry passengers

Corporations can take 100% depreciation on vehicles driven for personal use—if the
value of the personal use is included as taxable wages on the employee’s W-2.

Proprietorships can depreciate vehicles only to the extent that they are driven for
business.
In-class activities
 Taxation of passenger autos—Homework Exercises for Section 8, Problem 1.

Taxation of SUVs— Homework Exercises for Section 8, Problem 2

How to depreciate a sole proprietor’s vehicle— Homework Exercises for Section 8,
Problem 3.
Instructor’s Lecture Outline
9