Chapter 5
Alfadhel
Chapter5Lecture-2020w-explanation.pptxCSMT 0360 CONSTRUCTION ACCOUNTING and FINANCIAL MANAGEMENT
SPRING 2020
Chapter 5 - Depreciation
Purpose
Financial statements
Cost allocation of equipment
Taxes
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Variables
P = Purchase price
F = Salvage Value
Zero for tax purposes
N = Recovery period (years)
Set by code for tax purposes
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Variables
Rm = Percentage of depreciation taken in year m
Dm = Depreciation for year m
BVm = Book value at the end of year m
Book value equals the purchase price less the depreciation recorded to date
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Straight-Line
Depreciates uniformly over the life of the asset
Annual depreciation
Dm = (P – F)/N
Book Value
BVm = P – m(Dm)
-or-
BVm = BVm-1 – Dm
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Straight-Line
| m | Rm | Dm ($) | BVm ($) |
| 0 | 110,000 | ||
| 1 | 1/5 | 20,000 | 90,000 |
| 2 | 1/5 | 20,000 | 70,000 |
| 3 | 1/5 | 20,000 | 50,000 |
| 4 | 1/5 | 20,000 | 30,000 |
| 5 | 1/5 | 20,000 | 10,000 |
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Sum-of-the-Years
Accelerates depreciation
Annual depreciation
Dm = (P – F)Rm
Rm = (N – m + 1)/SOY
SOY = N(N + 1)/2
Book Value
BVm = BVm-1 – Dm
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Sum-of-the-Years
| m | Rm | Dm ($) | BVm ($) |
| 0 | 0 | 110,000 | |
| 1 | 5/15 | 33,333 | 76,667 |
| 2 | 4/15 | 26,667 | 50,000 |
| 3 | 3/15 | 20,000 | 30,000 |
| 4 | 2/15 | 13,333 | 16,667 |
| 5 | 1/15 | 6,667 | 10,000 |
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Declining-Balance Method
Accelerates depreciation
Annual depreciation
Dm = (BVm-1)Rm
Rm = 2.00/N for 200% declining-balance
Rm = 1.50/N for 150% declining-balance
Book Value
BVm = BVm-1 – Dm
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Declining-Balance Method
Does not automatically reach salvage value
Must stop depreciation at salvage value when book value goes below salvage value
- or -
Must switch to straight-line depreciation when the straight-line depreciation for the remaining years is greater than declining-balance depreciation
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Stopping at Salvage Value ($20,000)
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Year
Switching to Straight Line (SV = 0)
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Year
MACRS
Modified accelerated cost recovery system
The IRS’s rules for depreciation
Depreciation methods used:
Double declining balance
150% declining balance
Straight line
Includes rules for placing and removing assets from service
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Placing in Service
Half-year
General rule
Mid-quarter
Must use when placing 40% or more of assets in service during the last quarter
Mid-month
For real estate
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IRS Recovery Periods
Three-year: Rent-to-own property and tractors
Five-year: Automobiles, light general propose trucks, calculators, copiers, computer equipment, concrete trucks, heavy general purpose trucks, trailers, and other construction assets
Seven-year: Office furniture, office equipment, and railroad tracks
Ten-year: Vessels, barges, tugs, and other water transportation equipment
Fifteen-year: Retail motor fuel outlets
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IRS Recovery Periods
Twenty-year: Farm buildings
Twenty-five-year: Municipal sewers, water treatment plants, and water distribution lines
Twenty-seven-and-a-half-year: Residential real estate where more than 80% of the rent is derived from the dwelling units
Thirty-nine-year: Non-residential real estate
Fifty-year: Railroad roadbeds, right-of-ways, and tunnels
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Use of Depreciation Tables
Find correct table
Find correct recovery period for asset across top of table
Percentages are percentage of asset value depreciated during the year
not the percent of the previous year’s book value
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Use of Depreciation Tables
| Table 5-6 Depreciation Rates for 200% Declining-Balance Using the Half-Year Convention | ||||
| Year | 3 years (%) | 5 years (%) | 7 years (%) | 10 years (%) |
| 1 | 33.33 | 20.00 | 14.29 | 10.00 |
| 2 | 44.45 | 32.00 | 24.49 | 18.00 |
| 3 | 14.81 | 19.20 | 17.49 | 14.40 |
| 4 | 7.41 | 11.52 | 12.49 | 11.52 |
| 5 | NA | 11.52 | 8.93 | 9.22 |
| 6 | NA | 5.76 | 8.92 | 7.37 |
| 7 | NA | NA | 8.93 | 6.55 |
| 8 | NA | NA | 4.46 | 6.55 |
| 9 | NA | NA | NA | 6.56 |
| 10 | NA | NA | NA | 6.55 |
| 11 | NA | NA | NA | 3.28 |
IRS, Instructions for Form 4562, 2006, p. 13
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Section 179
Can expense up to $250,000 (for 2010) of equipment without depreciation
Deduction is reduced if you place more than $800,000 of Section 179 property in services during the year
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Chapter 5 Construction Accounting Systems
QUESTIONS????? – [email protected]
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