Depreciation
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Depreciation. Unit 2 Inventory Control. Depreciation. Loss of value due to age, use, obsolescence claimed as an expense for tax purposes. Tangible property allows businesses to spread their investment in equipment as an expense over the life of the equipment. Depreciation methods.

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Depreciation

Unit 2

Inventory Control


Depreciation

  • Loss of value due to age, use, obsolescence

  • claimed as an expense for tax purposes.

  • Tangible property

  • allows businesses to spread their investment in equipment as an expense over the life of the equipment.


Depreciation methods

  • GDS-General Depreciation System based on (MACRS)- Modified Accelerated cost Recovery System.

  • ADS- Alternative Depreciation System


Property classes- 3 year

  • Trucks- over the road tractors

  • race horses

  • Breeding hogs


5 year property

  • Machinery

  • heavy trucks

  • computers

  • office machines

  • breeding cattle sheep,goats.


7 year property

  • Office furniture

  • all other property not designated by law


10 year property

  • Single purpose agriculture

  • horticulture structures

  • tree or vine fruit and nut crops


15 year property

  • Direct land improvements

    • fences, roads, bridges, shrubs

  • Service station buildings and equipment


20 year property

  • General purpose farm buildings


Residential rental property

  • Rental homes or apartments

  • 27.5 year recovery


Nonresidential real property

  • Commercial buildings

  • 39 year life if placed in service after May 12, 1993

  • 31.5 year life if placed in service before May 13, 1993


Guidelines for using Depreciation

  • MACRS or ADS

  • Half Year convention

  • Basis: amount you can depreciate

    • Cost $- Trade-ins or rebates= adjusted basis


Depreciation problem

  • You purchase a new delivery truck in January of this year for $42,000. You traded in your old one and received $5,000.

  • What recovery life does this have?

  • Calculate a depreciation schedule using MACRS

  • Calculate a depreciation schedule for ADS


MACRS Schedule

  • 1 15% x 37,000 = $5550

  • 2 25.5%

  • 3 17.85%

  • 4 16.66%

  • 5 16.66%

  • 6 8.33%________


ADS Schedule

  • 1 10%

  • 2 20%

  • 3 20%

  • 4 20%

  • 5 20%

  • 6 10%


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