IEN255 Chapter 7 - Depreciation

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IEN255 Chapter 7 - Depreciation

• fig 7.1

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Depreciation

• Economic Depreciation Purchase Price - Market
  Value
• Accounting
• capitalized accounting depreciationasset
  depreciation
• fraction of the cost is chargeable in each period

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Depreciable Property

• It must be used in business or held for
  production of income
• It must have a definite service life longer than
  1 year
• It must be something that wears out, decays, gets
  used up, becomes obsolete (ie, not land)

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Terms

• Cost Basis - actual cost and other expenses
• Salvage Value - estimated value at end of life
• Depreciable Life - how many periods is it useful?
• Two methods
• tax - for IRS
• book - for reports
• straight line
• accelerated
• unit of production

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Book Method

• Straight line

(7.1)
Dn Depreciation charge during year n I
Cost of the Asset (including installation
expenses) S Salvage value at end of useful
life N Useful life Book value Bn I - (D1
D2 D3 Dn)
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Example 7.3
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Accelerated Methods (declining balance)

• Fixed fraction
• ? (1/N)(multiplier)
• for any year the depreciation is
• Dn ?I(1- ?)n-1 (7.4)
• the total depreciation to year n is
• I1-(1- ?)n (7.7)
• the book value at n is
• Bn I(1- ?)n (7.7)

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What about salvage value?

• Case 1 Bn gt S
• switch to SL from DB
• Case 2 Bn lt S
• stop when depreciation reaches salvage value

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Sum of Years Digits

• SOYD N(N1)/2 (7.10)
• example 7.7

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Units of Production

• Unequal use

(7.12)
Example 7.8
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Tax Depreciation

• MACRS (Modified Accelerated Cost Recovery System)
• Salvage Value is always zero
• table 7.2

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MACRS Depreciation Rates

• Table 7.3

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Switching

• Example 7.9

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Depletion

• Figure 7.7

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Repairs or Improvements

• Can we estimate useful life accurately?
• Fig 7.8

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IEN255 Summer99 Chapter 6 7 HW3

• Homework Assignment
• Chapter 6
• s 6.1 6.5 6.7a,c 6.11 6.20 6.28
• Chapter 7
• 7.3 7.6 7.15 7.18 7.26 7.36
• Chapter 8 (not due, but attempt the homework)
• 8.1 8.5 8.11 8.16 8.17 8.23
• Due together (Tues July 13)

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Sample solution from 6.7