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**Contemporary Mathematics for Business and Consumers**

Third Edition By: Robert A. Brechner COPYRIGHT © 2003 by South-Western, a division of Thomson Learning. Thomson LearningTM is a trademark used herein under license. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means–graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems–without the written permission of the publisher. For permission to use material from this text or product, contact us by Tel (800) Fax (800)

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Chapter 17 Depreciation Copyright © 2003 by South-Western

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**Outline Chapter 17, Depreciation**

Section I Traditional Depreciation –Methods used for Financial Statement Reporting 17-1 Calculating depreciation by the straight-line method. 17-2 Calculating depreciation by the sum-of- years-digits. 17-3 Calculating depreciation by the declining-balance method. 17-4 Calculating depreciation by the units-of-production method. Section II Asst Cost Recovery Systems –IRS Prescribed Methods for Income Tax Reporting 17-5 Calculating depreciation by using the Modified Accelerated Cost Recovery System (MACRS). 17-6 Calculating the periodic depletion cost of natural resources.

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**Section I, Traditional Depreciation – Methods for Financial Statement Reporting**

Outline 17-1 Calculating Depreciation by the Straight-Line Method Steps to Prepare a Depreciation Schedule by the Straight –Line-Method: Step 1. Determine the total coast and salvage value of the asset. Step 2. Subtract salvage value from total cost to find amount total amount of depreciation. Step 3. Calculated the amount of depreciation by dividing the total depreciation by the useful life of the asset. Step 4. Set up the depreciation schedule in the form of a chart with the following headings: End Annual Accumulated Book of Year Depreciation Depreciation Value

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Everybody’s Business Learning Tip On a depreciation schedule, the starting book value is the original cost of the asset, and the last book value is the salvage value of the asset.

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**17-2 Calculating Depreciation by the Sum-of-Years’-Digits Method**

Steps to Prepare a Depreciation Schedule by the um-of-Years’-Digits Method: Step 1. Find the total depreciation of the asset by Step 2. Calculate the SYD depreciation rate fraction for each year by. Total depreciation = Total cost – Salvage value SYD depreciation rate fraction = Years of useful life remaining n (n=1) 2

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**17-2 Calculating Depreciation by the Sum-of-Years’-Digits Method (Cont**

Steps to Prepare a Depreciation Schedule by the um-of-Years’-Digits Method: Step 3. Calculate the depreciation for each year by multiplying the total depreciation by that years’ depreciation rate fraction. Step 4. Set up the depreciation schedule in the form of a chart with the following headings: End of Total Depreciation Annual Accumulated Book Year Depreciation x Rate fraction = Depreciation Depreciation Value Annual depreciation = total depreciation x Depreciation rate fraction

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Everybody’s Business Real World Connection From Chapter 15, Financial Statements, remember that depreciation appears on both the balance sheet and the income statement. Balance sheet – Used to determine book value of an asset. Income statement- Listed as an operating expense.

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**Section II, Asset Cost Recovery Systems – IRS Prescribed Methods for Income Tax Reporting**

17-5 Calculating Depreciation by Using the Modified Accelerated Cost Recovery System (MACRS) Steps to Prepare a Depreciation Schedule by Using MACRS: Step 1. Use Table 17-1 to determine the property calss for the asset in question. Step 2. Multiply the cost recovery percentage for each year, from Table 17-2, by the original basis of the asset. Step 3. Set up the depreciation schedule in the form of a chart with the following headings: End of Original Cost recovery Cost recovery Accumulated Book Year Basis Percentage (depreciation) Depreciation Value

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Everybody’s Business Learning Tip In MACRS, the entire asset is depreciated. There is no salvage value. Note that the percents for any given property class in the Cost Recovery Percentage table add up to 100%

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**17-6 Calculating the Periodic Depletion cost of Natural Resources**

Steps to Calculate the Periodic Depletion Cost of Natural Resources: Step 1. Compute the average depletion cost per unit by Step 2. Calculate the periodic depletion cost by: Average depletion cost per unit = Total cost of resources – Residual value Estimated total units available Periodic = Units produced in Average depletion depletion current period X cost per unit cost

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**Key Terms Chapter 17, Depreciation Long-term assets Depreciation**

Depreciation schedule Sum-of-the-years’digit Double-declining balance Total cost General depreciation system (GOS) Alternative depreciation system (ADS) Modified accelerated cost recovery system (MACRS) Straight-line depreciation Wasting assets Accelerated depreciation Depletion Declining-balance Half year convention Useful life Units-of-production Book value Cost recovery allowance Property class

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**Chapter 17 Straight-Line Method**

Total cost = Cost + Freight + Setup expenses Total depreciation = Total cost - Salvage value Total depreciation Estimated useful life (years) Annual depreciation = Copyright © 2003 by South-Western

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**Chapter 17 “Formulas” Sum-of-the-Years’ Digits Method**

Years of useful life remaining n(n + 1) 2 Annual depreciation = Total depreciation x Depreciation rate factor SYD depreciation rate fraction = Copyright © 2003 by South-Western

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**Chapter 17 “Formulas” Declining-Balance Method**

Declining-balance rate = x Multiple Beginning book value = Ending book value of previous year Ending book value = Beginning book value - Depreciation for the year 1 Useful life Copyright © 2003 by South-Western

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**Chapter 17 “Formulas” Units-of-Production Method Cost - Salvage value**

Units of useful life Annual depreciation = Depreciation per unit x Units produced Depreciation per unit = Copyright © 2003 by South-Western

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**Chapter 17 “Formulas” MACRS Depreciation**

Depreciation deduction = Original basis x Cost recovery % Natural Resources Depletion Total cost of resource - Residual value Estimated total units available Periodic depletion = Units produced in x Average depletion cost current period cost per unit Average depletion = cost per unit Copyright © 2003 by South-Western

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**Chapter 17, Section II Business Decision Intangible Write-offs**

As you have seen in this chapter, companies depreciate or write-off the expense of tangible assets, such as trucks and equipment over a period of its useful life. Many companies also have intangible assets that must be accounted for as an expense over a period of time. Intangible assets are resources that benefit the company, but do not have any physical substance. Some examples are copyrights, franchises, patents, trademarks and leases. In accounting, intangible assets are written off in a procedure known as asset amortization. This is much like straight-line depreciation, but there is no salvage value. Copyright © 2003 by South-Western

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Chapter 17, Section II a. Using the straight-line method, calculate the patent’s annual amortization expense for the years before the lawsuit. $600,000 b. Calculate the amortization expense per year for the remaining years after the lawsuit. $655,000 Copyright © 2003 by South-Western

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