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Depreciation. Chapter 4. Depreciation. Allocating the expense of a resource which lasts > 1 year. e.g. tractors, barns, bulls, fences. Calculation Need to know: 1. Purchase Price – Cost 2. Useful Life – Life 3. Salvage Value – S.V. 4. Depreciation Method – Meth .

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depreciation

Depreciation

Chapter 4

depreciation2
Depreciation
  • Allocating the expense of a resource which lasts > 1 year.
  • e.g. tractors, barns, bulls, fences.
  • Calculation
    • Need to know:
      • 1. Purchase Price – Cost
      • 2. Useful Life – Life
      • 3. Salvage Value – S.V.
      • 4. Depreciation Method – Meth
depreciation methods straight line
Depreciation Methods: Straight Line
  • Annual Depreciation = (cost-salvage value) /useful life

Or

  • Annual Depreciation = (cost–salvage value)*R
    • Where R is the annual straight- line percentage rate found by dividing 100% by the useful life (100% / useful life)
depreciation methods sum of the year s digits soyd
Depreciation Methods: Sum of the Year’s Digits (SOYD)
  • Annual Depreciation = (cost-salvage value) * RL/ SOYD

Where

    • RL= remaining years of useful life as of the beginning of the year for which depreciation is being computed.
    • SOYD= sum of all the number from 1 through the estimated useful life. For example for a 5-year useful life, SOYD would be 1+2+3+4+5=15 and it would be 55 for a 10 year useful life.
    • Highest the first year and then declines by a constant amount after.
depreciation method declining balance
Depreciation Method: Declining Balance
  • Annual Depreciation is = (Book Value at Beginning of Year) * R

Where

    • R is a constant percentage value or rate.
  • A variation on this is double declining balance.
  • Can’t have a zero salvage value.
depreciation method partial year depreciation
Depreciation Method: Partial Year Depreciation
  • For an asset purchase during the year the depreciation should be prorated for the amount of time that asset was used during the year.
income tax depreciation
Income Tax Depreciation
  • Current system is called MACRS
    • Assumptions:
      • An implied salvage value of zero
      • One-half year of depreciation allowed in the year of purchase regardless of the purchase date (some exceptions)
      • A system of property classes which fixes the useful life for each type of property.
income tax depreciation8
Income Tax Depreciation
  • 3-,5-,7-,10-,15-, or 20- year classes

Examples

    • 3-year: breeding hogs
    • 5-year: cars, pickups, breeding cattle and sheep, dairy cattle, computers, trucks.
    • 7-year: most farm machinery and equipment, fences, grain bins, silos, office furniture
    • 10-year: Single purpose agricultural and horticulture structures such as confinement swine facilities and green houses as well as trees bearing fruits or nuts.
    • 15-year: water wells, paved lots, drainage tile.
    • 20-year: general-purpose buildings such as machine sheds and hay barns
income tax depreciation9
Income Tax Depreciation
  • Rates are now based on the 150% declining balance method.
  • An example for a 5-year class of property

15%

25.5%

17.85%

16.66%

16.66%

8.33%

  • Notice it’s 6 years. Get only a half year the first year and a half the last.
valuation of assets
Valuation of Assets
  • It is necessary to determine the value of assets
    • Tax-purpose
    • Profit/ Income purposes
1 market value
1. Market Value
  • Current market price
  • “Fair Market Value”
  • Could or will be sold in short period of time
  • Ex: Stocks, bonds, cattle, hay, grain
2 cost
2. Cost
  • Valued at their original cost
  • This method works well for items that have to be purchased frequently.
    • eg. Supplies, feed, fertilizer
  • Items that lose value over time should not be valued with this method
3 lower of cost or market
3. Lower of Cost or Market
  • Value it at both and take the lower.
  • Minimizes change of placing too high a value on any item.

Truck Price increases > $12,000 (inflation)

Cost $12,000

Anything lower is market value.

4 farm production cost
4. Farm Production Cost
  • Items produced on farm can be valued at their production costs.
    • ie. Corn used for feeding.

No opportunity costs

*Conservative Valuation.

5 cost less depreciation
5. Cost Less Depreciation
  • Original cost less depreciation
  • Machinery, buildings, fences, breeding livestock
  • Resulting value commonly termed book value.