1. Chapter 3
Part 2

2. Depreciation
Depreciation = loss of value (ex. Driving a car off the lot)
Accounting depreciation, reflects the use of an asset during a period
Cost of using the asset in the year = Income statement
Reduction in the value = Balance sheet

3. Table 3-5: Calculating straight-line depreciation
Simplest way is straight-line depreciation
Full-historical costs of the asset (purchase price + delivery, installation, etc.)
Then subtract the expected salvage value at the end of the asset’s useful life
Divided by the number of years in the asset’s useful life

4. Example straight-line
Computer
$6,000 (historical costs)
Computer have a life of 3 years
Salvage value = 0
Annual depreciation is $2,000
Historical cost of asset
$6,000.00
Minus salvage value
0.00
Total
$6,000
Divided by estimated useful life 3
Annual depreciation expense
$2,000

5. Caveat
Organization subject to income taxation will not want to use straight-line depreciation
Depreciation is an expense that is deducted from net income for calculating tax liability, those organizations that are subject to income taxation can lower bills by increasing depreciation expense
IRS allows use of accelerated depreciation for organizations by using Modified Accelerated Cost Recovery Systems (MACRS) table = gives more useful ways to calculate depreciation
Push-Pull
Should I use depreciation to lower tax rate or not use to show better profit
Use both to demonstrate what’s going on
Taxes and shareholders, etc.  deferred tax liability

6. MACRS
MACRS = MODIFIED ACCELERATED COST RECOVERY SYSTEM = Allows for greater accelerated depreciation over longer time periods.

7. MACRS TABLE HOW TO USE THE MACRS TABLE
RECOVERY YEAR = CLASSES OF PROPERTY
1ST YEAR X%
2ND YEAR X%
ETC.

8. EXAMPLE
SALVAGE VALUE IS NOT CONSIDERED – IN ADDITION, A 5-YEAR PRODUCT IS DEPRECIATED FOR 6 YEARS; A 4-YEAR PRODUCT IS DEPRECIATED FOR 5 YEARS; ETC.
Year
3-year
5-year
7-year
10-year 1
33.3 20
14.3 10 2
44.5 32
24.5 18 3
14.8
19.2
17.5
14.4 4
7.4
11.5
12.5 5
8.9
9.2 6
5.8 7
6.6 8
4.5 9
6.5 11
3.3

9. Calculating 3-YEAR depreciation under MACRS1
33.3 20
14.3 10 2
44.5 32
24.5 18 3
14.8
19.2
17.5
14.4 4
7.4
11.5
12.5 5
8.9
9.2 6
5.8 7
6.6 8
4.5 9
6.5 11
3.3
Historical cost of asset
$6,000.00
Multiplied by the first-year MACRS (table 3-7 pg. 46)
0.333
Annual depreciation expense – YEAR 1
$1,998
Historical cost of asset
$6,000.00
Multiplied by the 2ND -year MACRS (table 3-7 pg. 46)
0.445
Annual depreciation expense –YEAR 2
$2,670
Historical cost of asset
$6,000.00
Multiplied by the 3RD -year MACRS (table 3-7 pg. 46)
0.148
Annual depreciation expense –YEAR 2
$888
Historical cost of asset
$6,000.00
Multiplied by the 4TH -year MACRS (table 3-7 pg. 46)
0.074
Annual depreciation expense –YEAR 2
$444