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GOALS BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 1 11.3Depreciation Costs Calculate depreciation using declining- balance method Calculate depreciation.

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Presentation on theme: "GOALS BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 1 11.3Depreciation Costs Calculate depreciation using declining- balance method Calculate depreciation."— Presentation transcript:

1 GOALS BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 1 11.3Depreciation Costs Calculate depreciation using declining- balance method Calculate depreciation using sum-of-the- years-digits method Calculate depreciation using modified accelerated cost recovery system method

2 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 2 Depreciation of Property The depreciation of property that has a life of more than one year is a major expense for many businesses. The Internal Revenue Service regulates the calculation of depreciation.

3 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 3 Depreciation Methods In addition to straight-line depreciation, businesses may use depreciation methods that deduct greater amounts in the early years than in later years. Two such methods are the declining-balance method and the sum-of-the-years-digits method.

4 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 4 BUSINESS TIP Taking large amounts of depreciation early on more closely reflects the real loss in resale value of many business properties. It also provides large, early tax deductions.

5 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 5 Book Value When calculating depreciation, the term book value is used. Book value is the original cost of the property less the total depreciation to date.

6 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 6 Declining-Balance Method The declining-balance method uses a fixed rate of depreciation for each year. Because the rate is applied to a declining or decreasing balance, the amount of depreciation decreases each year.

7 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 7 Sum-Of-The-Years-Digits Method Another way to calculate depreciation is the sum-of-the-years-digits method. This is a variable-rate method. Like the declining-balance method, the sum- of-the-years-digits method provides the greatest amount of depreciation in the first year and smaller amounts of depreciation after that. (continued on the next slide)

8 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 8 Sum-Of-The-Years-Digits Method For example, if you estimate to use a machine for five years, the amount of depreciation is calculated by adding the years together: 1 + 2 + 3 + 4 + 5 = 15 years. Then you depreciate the machine 5/15 of the total depreciation for the first year, 4/15 of the total depreciation for the second year, 3/15 for the third year, 2/15 for the fourth year, and 1/15 for the fifth year. (continued)

9 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 9 Modified Accelerated Cost Recovery System Method For federal income tax purposes, the modified accelerated cost recovery system (MACRS) must be used to calculate depreciation for most business property placed in service after 1986. The MACRS method allows you to claim depreciation over a fixed number of years depending on the class life of the property. Trade-in value, or salvage value, is not used in the MACRS method.

10 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 10 Class Life The class life means how long the Internal Revenue Service (IRS) will let you depreciate the property. The Internal Revenue Service (IRS) categorized the lives of different types of property into a number of classes, including 3, 5, 7, 10, 15, and 20 years. The rate of depreciation to be used for each year of a property’s life is set by the IRS and varies with each class life. You calculate the depreciation deduction for any one year by multiplying the original cost by the rate of depreciation for that year.

11 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 11 Sample Depreciation Rates

12 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 12 BUSINESS TIP The MACRS method allows businesses to depreciate their property fully and at a faster rate than they might otherwise. Congress passed the MACRS to encourage business to invest in new equipment.

13 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 13

14 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 14

15 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 15

16 BUSINESS MATH© Thomson/South-WesternLesson 11.3Slide 16

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