Case 9-3 Depreciation Accounting
Author Note
John G. Antich
School of Business, Liberty University
John G. Antich
I have no known conflict of interest to disclose.
Correspondence concerning this article should be addressed to John G. Antich
Email: [email protected]
ACCT632: A F A T
DVANCED INANCIAL CCOUNTING HEORY
Depreciation is an item in accounting which seems to vary in definition depending on the viewpoint. One
author defined it as “a system which aims to distribute the cost or other basic value of tangible capital
assets, less salvage (if any), over the estimated useful life of the assets in a systematic and rational
manner. It is a process of allocation and not valuation” (Bell, 1960). That last part coveys that even
though an item may be fully depreciated, it still has value. With large items such as property, plant, and
equipment, depreciation takes the place of an immediate expense for the company. Depreciation is
computed based on the item and its useful life in order to calculate a portion of the total amount spent
to depreciate each year in expenses. If a company purchases a building, usually there is a 27.5-to-31-year
life which the building price is depreciated over.
The value of the asset is not the amount of depreciation left in the account. The asset may still have
significantly more value than depreciation. As mentioned with the building purchase, a normal life for a
building is around 30 years, but obviously buildings can stand much longer than 30 years and still have
value even after their depreciation has run out.
Case 9-3 Depreciation Accounting
Depreciation continues to be one of the most controversial, difficult, and important problem areas in
accounting.
Required:
Explain the conventional accounting concept of depreciation accounting.
Discuss its conceptual merit with respect to
The value of the asset
The charge(s) to expense
The discretion of management in selecting the method
Explain the factors that should be considered when applying the conventional concept of depreciation
to the determination of how the value of a newly acquired computer system should be assigned to
expense for financial reporting purposes (ignore income tax considerations).
What depreciation methods might be used for the computer system? Describe the advantages and
disadvantages of each.
Case 9-3 Depreciation Accounting
When a large item is purchased, a business must decide how they will schedule it to be depreciated. The
simplest method is subtracting the salvage value from the purchase price and dividing that amount by
the years of useful life. The expense taken each year for tax purposes is this calculated amount. This
allows the business to utilize the deduction over several years. This depreciation method is best for large
financed purchases such as a vehicle where the entire cost is not paid immediately therefore the entire
expense is not recognized immediately. However, Section 179 of the Internal Revenue Code allows for
business to expense the entire amount of a purchase in one year (2018). There are certain limitations;
one being a loss cannot be created due to a Section 179 depreciation method.
Businesses must choose a schedule to depreciate their assets. Under GAAP, there are four approved
methods to follow: Straight-line, Units of Production, Declining Balance, and Sum of the Years’ Digits
(Smyth, 2019). Each of these methods are computed differently. GAAP recommends these methods in
order to provide consistency among business and accountants.
The factors which must be considered are price of the system and useful life. This computer system is an
intangible asset which cannot be touched or consumed therefore we would amortize it which is a
different form of depreciation. As a general rule IRC 197 states, “A taxpayer shall be entitled to an
amortization deduction with respect to any amortizable section 197 intangible. The amount of such
deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of
such intangible ratably over the 15-year period beginning with the month in which such intangible was
acquired” (2018).
If a computer system does not qualify for this amortization, a 3-year straight line depreciation schedule is
widely accepted (Battersby, 2005). Also as previously mentioned a full depreciation expense could be
elected under Section 179 if stipulations are met. This immediate method has the advantage of a higher
deduction amount in the first year leading to lower net income and less taxes for owners. But this
Case 9-3 Depreciation Accounting
method does not allow for a loss in the year. The 3-year method allows for smaller deductions over the
life and will not change based on the profit or loss for the year. Both methods are acceptable and must
be chosen by the business and their accountants for which suits them best.
Depreciation is a complex system in accounting, but it can help a company navigate future deductions
with useful life depreciation computations. Ecclesiastes 3:1 states, “To everything there is a season, and
a time to every purpose under the heaven:” (King James Bible, 1769/2017). Depreciation is all about
allocating the right amount over time. Sometimes it is right to expense everything; other times it is best
to expense costs over several years. The useful life of a Christian has an end one day when we die. We
must be useful to God in that time in order to bring profit to His kingdom.
Case 9-3 Depreciation Accounting
King James Bible. (2020). King James Bible Online. https://www.kingjamesbibleonline.org/ (Original
work published 1769)
References
Bell, C. S. (1960). Elementary Economics and Depreciation Accounting. The American
Economic Review, 50(1). Retrieved September 26, 2021, from
https://www.jstor.org/stable/1813467.
Legal Information Institute. (2018). 26 U.S. Code § 179 - election to expense CERTAIN
Depreciable business assets. Legal Information Institute. Retrieved September 27, 2021,
from https://www.law.cornell.edu/uscode/text/26/179.
Legal Information Institute. (2018). 26 U.S. Code § 197 - amortization of goodwill and certain
other intangibles. Legal Information Institute. Retrieved September 27, 2021, from
https://www.law.cornell.edu/uscode/text/26/197.
Battersby, M. E. (2005, October 7). Business taxes 101: Deducting computer software and web
site... The Hearing Review. Retrieved September 27, 2021, from
https://www.hearingreview.com/inside-hearing/research/business-taxes-101-deducting-
computer-software-and-web-site-development-costs.
Smyth, D. (2019, August 9). What are the gaap rules for depreciation? Bizfluent. Retrieved
September 27, 2021, from https://bizfluent.com/info-8217811-gaap-rules-
depreciation.html.
