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Methods of Depreciation TEACHER VERSION

Methods of Depreciation TEACHER VERSION. Things of Value. That You Own. That Businesses Own. What is Depreciation?. An expense based on the expectation that an asset will gradually decline in usefulness due to time, wear & tear, or obsolescence. Trade in Value/Salvage Value.

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Methods of Depreciation TEACHER VERSION

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  1. Methods of DepreciationTEACHER VERSION

  2. Things of Value That You Own That Businesses Own

  3. What is Depreciation? An expense based on the expectation that an asset will gradually decline in usefulness due to time, wear & tear, or obsolescence.

  4. Trade in Value/Salvage Value • The value after it has completed its useful life is referred to as the trade in value, salvage value or residual value.

  5. Straight-Line Method Yearly depreciation = cost of asset – trade in value years of life Cost = $36,000 Years of life = 5 years Trade in value = $6,000 Calculate the yearly depreciation using the above equation……..

  6. Answer $36,000 - $6,000 = $30,000 = 5 years 5 years $6,000 How about monthly?????

  7. Straight Line Method:Truck with a trade in value of $6000

  8. Practice Problems SL Method • $49,720, salvage $$6,880, life 7 years: • $75,000, salvage $18,900, life 7 years: • $45,325, salvage $1,235, life 4 years:

  9. Double Declining Balance Method • Accelerated Depreciation Method- It depreciates MOST in the beginning. • Trade in value/Salvage Value is not considered • Calculated using asset’s book value (original –A/D) • Follow these steps to determine the DDB rate • 1. compute the annual straight line depreciation rate • Year/useful life – 1÷5 = 20% • 2. multiply the rate by 2. this is the DDB rate • 20% x 2 = 40%

  10. Double Declining Balance Method$16,000 , life of 5 years, salvage $1500 1/5 = .2 x 2 = .4 x 100 = 40%

  11. Complete the Following Straight-line method • **Problem A1-text appendix page A-4 Double Declining method: • **Problem A2-text appendix page A-4 MACRS- • ** Problem A3- Text appendix page A-4

  12. A-1 Straight Line Depreciation Straight-line method **Problem A1-text appendix page A-4

  13. Double Declining Balance Method Double Declining method: **Problem A2-text appendix page A-4

  14. Modified Tax Recovery System MACRS Property is divided into nine classes to determine the useful years. Under MACRS the trade in value is ignored. This method is a combination of straight line and double declining method. Turn to page A-3 in the Appendix to view the property description.

  15. MACRS Depreciation • Which Property class is the following? • Warehouse? • Trucks? • Furniture? • Fences? • How much would each depreciate YEARLY?

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