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Depreciation

Depreciation. Unit 2 Inventory Control. Depreciation. Loss of value due to age, use, obsolescence claimed as an expense for tax purposes. Tangible property allows businesses to spread their investment in equipment as an expense over the life of the equipment. Depreciation methods.

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Depreciation

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  1. Depreciation Unit 2 Inventory Control

  2. Depreciation • Loss of value due to age, use, obsolescence • claimed as an expense for tax purposes. • Tangible property • allows businesses to spread their investment in equipment as an expense over the life of the equipment.

  3. Depreciation methods • GDS-General Depreciation System based on (MACRS)- Modified Accelerated cost Recovery System. • ADS- Alternative Depreciation System

  4. Property classes- 3 year • Trucks- over the road tractors • race horses • Breeding hogs

  5. 5 year property • Machinery • heavy trucks • computers • office machines • breeding cattle sheep,goats.

  6. 7 year property • Office furniture • all other property not designated by law

  7. 10 year property • Single purpose agriculture • horticulture structures • tree or vine fruit and nut crops

  8. 15 year property • Direct land improvements • fences, roads, bridges, shrubs • Service station buildings and equipment

  9. 20 year property • General purpose farm buildings

  10. Residential rental property • Rental homes or apartments • 27.5 year recovery

  11. Nonresidential real property • Commercial buildings • 39 year life if placed in service after May 12, 1993 • 31.5 year life if placed in service before May 13, 1993

  12. Guidelines for using Depreciation • MACRS or ADS • Half Year convention • Basis: amount you can depreciate • Cost $- Trade-ins or rebates= adjusted basis

  13. Depreciation problem • You purchase a new delivery truck in January of this year for $42,000. You traded in your old one and received $5,000. • What recovery life does this have? • Calculate a depreciation schedule using MACRS • Calculate a depreciation schedule for ADS

  14. MACRS Schedule • 1 15% x 37,000 = $5550 • 2 25.5% • 3 17.85% • 4 16.66% • 5 16.66% • 6 8.33% ________

  15. ADS Schedule • 1 10% • 2 20% • 3 20% • 4 20% • 5 20% • 6 10%

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