Methods of Depreciation TEACHER VERSION Things of Value

Methods of Depreciation TEACHER VERSION

Things of Value That You Own That Businesses Own

What is Depreciation? An expense based on the expectation that an asset will gradually decline in usefulness due to time, wear & tear, or obsolescence.

Trade in Value/Salvage Value The value after it has completed its useful life is referred to as the trade in value, salvage value or residual value.

Straight-Line Method Yearly depreciation = cost of asset – trade in value years of life Cost = $36, 000 Years of life = 5 years Trade in value = $6, 000 Calculate the yearly depreciation using the above equation……. .

Answer $36, 000 - $6, 000 = $30, 000 = 5 years $6, 000 How about monthly? ? ?

Straight Line Method: Truck with a trade in value of $6000 Y r Depreciation for the Year Accumulated Depr Book Value 1 18000 / 5 years = 3600 3600 24000 – 3600 = 20400 2 18000 / 5 years = 3600 + 3600 = 7200 24000 – 7200 = 16800 3 18000 / 5 years = 3600 7200 + 3600 = 10800 24000 – 10800 = 13200 4 18000 / 5 years = 3600 10800 + 3600 = 14400 24000 – 14400 = 9600 5 18000 / 5 years = 3600 14400 + 3600 = 18000 24000 – 18000 = 6000 total $18000

Practice Problems SL Method 1. $49, 720, salvage $$6, 880, life 7 years: 2. $75, 000, salvage $18, 900, life 7 years: 3. $45, 325, salvage $1, 235, life 4 years:

Double Declining Balance Method Accelerated Depreciation Method- It depreciates MOST in the beginning. Trade in value/Salvage Value is not considered Calculated using asset’s book value (original –A/D) Follow these steps to determine the DDB rate 1. compute the annual straight line depreciation rate Year/useful life – 1÷ 5 = 20% 2. multiply the rate by 2. this is the DDB rate 20% x 2 = 40%

Double Declining Balance Method $16, 000 , life of 5 years, salvage $1500 yr Depreciation for Year Accumulated Depreciation BV = Cost – Accum Depreciation 1 16000 x 40% = 6400 16000 -6400=9600 2 9600 x 40% = 3840 6400 + 3840= 10240 16000 -10240=5760 3 5760 x 40% = 2304 10240 + 2304 = 12544 16000 -12544=3456 4 3456 x 40% = 1382. 4 12544 + 1382. 4 = 13926. 4 16000 -13926. 4=2073. 6 5 2073. 6 x 40% = 13926. 4 + 573. 6 = 14500 829. 44 Cannot exceed salvage, So 2073. 6 -1500= 573. 6 is the amt of depreciation used 1/5 =. 2 x 2 =. 4 x 100 = 40% 16000 -14500= 1500 Salvage value

Complete the Following Straight-line method **Problem A 1 -text appendix page A-4 Double Declining method: **Problem A 2 -text appendix page A-4 MACRS- ** Problem A 3 - Text appendix page A-4

A-1 Straight Line Depreciation Straight-line method **Problem A 1 -text appendix page A-4 Yea Depreciation for the Year r Accumulated Depreciation Book Value (cost – 1 2 3 4 5 A. D. )

Double Declining Balance Method Double Declining method: **Problem A 2 -text appendix page A-4 Yea Depreciation for the Year r Accumulated Depreciation Book Value (cost – A. D. ) 1 2 3 4 5

Modified Tax Recovery System MACRS Property is divided into nine classes to determine the useful years. Under MACRS the trade in value is ignored. This method is a combination of straight line and double declining method. Turn to page A-3 in the Appendix to view the property description.

MACRS Depreciation Which Property class is the following? Warehouse? Trucks? Furniture? Fences? How much would each depreciate YEARLY?