1. Depreciation Chapter 4

2. Depreciation Allocating the expense of a resource which lasts > 1 year. e.g. tractors, barns, bulls, fences. Calculation Need to know: 1. Purchase Price – Cost 2. Useful Life – Life 3. Salvage Value – S.V. 4. Depreciation Method – Meth

3. Depreciation Methods: Straight Line Annual Depreciation = (cost-salvage value) /useful life Or Annual Depreciation = (cost–salvage value)*R Where R is the annual straight- line percentage rate found by dividing 100% by the useful life (100% / useful life)

4. Depreciation Methods: Sum of the Year’s Digits (SOYD) Annual Depreciation = (cost-salvage value) * RL/ SOYD Where RL= remaining years of useful life as of the beginning of the year for which depreciation is being computed. SOYD= sum of all the number from 1 through the estimated useful life. For example for a 5-year useful life, SOYD would be 1+2+3+4+5=15 and it would be 55 for a 10 year useful life. Highest the first year and then declines by a constant amount after.

5. Depreciation Method: Declining Balance Annual Depreciation is = (Book Value at Beginning of Year) * R Where R is a constant percentage value or rate. A variation on this is double declining balance. Can’t have a zero salvage value.

6. Depreciation Method: Partial Year Depreciation For an asset purchase during the year the depreciation should be prorated for the amount of time that asset was used during the year.

7. Income Tax Depreciation Current system is called MACRS Assumptions: 1. An implied salvage value of zero 2. One-half year of depreciation allowed in the year of purchase regardless of the purchase date (some exceptions) 3. A system of property classes which fixes the useful life for each type of property.

8. 3-,5-,7-,10-,15-, or 20- year classes Examples 3-year: breeding hogs 5-year: cars, pickups, breeding cattle and sheep, dairy cattle, computers, trucks. 7-year: most farm machinery and equipment, fences, grain bins, silos, office furniture 10-year: Single purpose agricultural and horticulture structures such as confinement swine facilities and green houses as well as trees bearing fruits or nuts. 15-year: water wells, paved lots, drainage tile. 20-year: general-purpose buildings such as machine sheds and hay barns Income Tax Depreciation

9. Rates are now based on the 150% declining balance method. An example for a 5-year class of property 15% 25.5% 17.85% 16.66% 8.33% Notice it’s 6 years. Get only a half year the first year and a half the last. Income Tax Depreciation

10. Valuation of Assets It is necessary to determine the value of assets Tax-purpose Profit/ Income purposes

11. 1. Market Value Current market price “Fair Market Value” Could or will be sold in short period of time Ex: Stocks, bonds, cattle, hay, grain

12. 2. Cost Valued at their original cost This method works well for items that have to be purchased frequently. eg. Supplies, feed, fertilizer Items that lose value over time should not be valued with this method

13. 3. Lower of Cost or Market Value it at both and take the lower. Minimizes change of placing too high a value on any item. Truck Price increases > $12,000(inflation) Cost $12,000 Anything lower is market value.

14. 4. Farm Production Cost Items produced on farm can be valued at their production costs. ie. Corn used for feeding. No opportunity costs *Conservative Valuation.

15. 5. Cost Less Depreciation Original cost less depreciation Machinery, buildings, fences, breeding livestock Resulting value commonly termed book value.