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Depreciation Methods: Graw Hill
Depreciation Methods: Graw Hill
DEPRECIATION METHODS
Blank & Tarquin: 5th edition. Ch.16 Authored by Dr. Don Smith, Texas A&M University 1
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16 Preliminary Statement
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Learning Objectives
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16 Learning Objectives
1. Depreciation Terminology
2. Straight-Line Depreciation
3. Double Declining Balance
Depreciation
4. Modified Accelerated Cost Recovery
System (MACRS)
5. Determining the MACRS Recovery
Period
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16.1
DEPRECIATION TERMINOLOGY
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16.1 Depreciation–Definition
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Book Depreciation
Used by a firm for internal financial and
managerial management.
Tax Depreciation
Used by a firm for state and federal income
tax reporting.
Follows strict rules and regulations.
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Tax Depreciation:
Must follow current state and federal law
pertaining to acceptable methods for
computing depreciation for income tax
purposes.
Federal Lever (2001)
MACRS Methods
General Depreciation System (GDS).
Alternate Depreciation System (ADS).
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Book value:
Accounting Term,
Reflects the undepreciated (value) on the
firm’s books at a given point in time.
May or may not reflect the true market
value of the asset at a point in time.
Market value of an asset is what a willing
buyer and willing seller agree to
consummate a sale or exchange.
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DEPRECIATION TERMINOLOGY
Important Terms and Their Meanings
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16.1 Terminology
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Included are:
most manufacturing and service industry
property vehicles,
manufacturing equipment, materials
handling devices, computers, and
networking equipment,
telephone equipment office furniture,
refining process equipment, and much
more.
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Real or personal;
Productive assets;
Buildings and structures, but not land.
Used in the pursuit of income
generation;
Have a finite, estimatable life
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16.1 History
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It is beneficial to compare:
Straight-line,
SYD, and
DB methods.
The best way is to plot the book values
of each method vs. the recovery period
(time).
See Figure 16.1 on page 510.
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16.1 Keeping Up
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16.2
STRAIGHT-LINE (SL)
DEPRECIATION
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16.2 SL Example
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Dt ( B S )d [16.1]
BS
Dt [16.2]
n
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SLN(B,S,n)
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16.2 SL Example
B = $50,000;
“n” = 5 years;
S = $10,000 at t = 5;
Dt for each year is:
($50,000 - $10,000)/5 = $8,000/year
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t Dt BVt
1 $8,000 $42,000
2 8,000 34,000
3 8,000 26,000
4 8,000 18,000
5 8,000 10,000
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16.2 SL Observations
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16.3
DECLINING BALANCE AND DOUBLE
DECLINING BALANCE
DEPRECIATION
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DB is an accelerated depreciation
method;
Provides greater depreciation amounts
in the early time periods over the SL
method.
Is more complex that the SL method.
Requires assuming a DB rate –
normally taken to equal 2 x SL rate.
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16.3 DB Rate
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Dt (d ) BVt 1 [16.5]
t 1
dt (d ) B(1 d ) [16.6]
Depr. Rate
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t 1
Dt (d ) B(1 d ) [16.7]
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BVt B(1 d ) t
[16.8]
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S BVn B(1 d ) n
[16.9]
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16.3 DB rate – d
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B = $80,000;
n = 10 years;
S = $10,000;
Apply the DB and DDB methods to
compute the depreciation amounts and
associated BV’s.
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