Depreciation Chapter 11: Newnan, Eschenbach, and Lavelle Dr. Hurley’s AGB 555 Course.

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Presentation transcript:

Depreciation Chapter 11: Newnan, Eschenbach, and Lavelle Dr. Hurley’s AGB 555 Course

Depreciation Depreciation is a way of handling a decrease in an assets value. This can occur due to deterioration of the asset or obsolescence of an asset Several definitions: Decline in market value of an asset Decline in value of an asset to its owner Systematic allocation of costs over the life of the asset Depreciation is a business expense allowed by the government to handle the using up of an asset over time.

Property Types Tangible Real This is usually property that is somehow attached to the land Personal Intangible E.g., patents, copyrights, trademarks, etc.

Book Value This is the asset’s cost minus the accumulated depreciation Book value is different from market value

Historical and Current Methods of Depreciation Historical Straight-Line Depreciation Sum-of Years’-Digits Declining Balance E.g., double declining balance Current Modified Accelerated Cost Recovery System (MACRS) This divides the asset into one of several asset class and uses a predetermined percentage that comes from the government

Depletion Depletion is a form of depreciation It relates to the using up a natural resource It is typically put on a per unit basis that is not time base

Depreciation and Asset Disposal An assets market value and its book value are usually different This can cause a tax issue when the asset is sold or disposed of There are three possibilities that occur with an asset Depreciation Recapture (Ordinary Gains) This is when an asset is sold for more than book value Losses This is when an asset is sold for less than book value Capital Gains This is when the asset is sold for more than the original cost basis

The VDB Function in Excel Excel has a function that deals with variable declining balance methods =VDB(cost, salvage, life, start_period, end_period, factor, no_switch) To simulate MACRS with the VDB function, you need the following assumptions: Salvage = 0 Life = 3, 5, 7, 10, 15, 20 First period runs from 0 to 0.5, then 0.5 to 1.5, …, last period equals life to life Factor =2 for Life = 3, 5, 7, 10 and Factor = 1.5 for Life = 15, 20 No_switch can be omitted