Date post: | 21-Mar-2017 |
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Education |
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CAPITAL
EXPENDITUR
E
Types of Expenditure
Estimated Useful Life – Number of years or time
periods for which the company can use the asset
Depreciation – An estimate of the use or deterioration of an asset
Asset Cost – Amount paid for an asset including freight charges
CONCEPT OF DEPRECIATION
Residual Value (Salvage Value) - Expected cash value at the end of an
asset’s useful life.
14-5
Straight-Line MethodDistributes the same amount of expense to each period of time.
Depreciation expense = Cost -- Residual value each year Estimated useful life in years
Ajax Company bought equipment for $2,500. The company estimates that the equipment’s period of useful life will be 5 years. After 5 years the residual value is $500. Calculate depreciation expense and complete a depreciation schedule.
($2,500 -- $500) 5
100% = 100%# of yrs. 5= $400 = 20%
Example:
Units-of-Production Method
Depreciation determined by how much the company uses the asset.
Depreciation expense = Cost -- Residual value per unit Total estimated units produced
Depreciation = Unit x Units amount depreciation produced
($2,500 -- $500) 4000 = $.50=
Depreciation expense = Book value of equipment x Depreciation each year at beginning of year rate
Accelerated method which computes more depreciation expense in the early years of the asset’s life. Uses up to
twice the straight-line rate.
Declining-Balance Method
Rate = 100% 5 years
x 2 = 40%
MACRS DepreciationRequired method to use for tax depreciation in USA only
Originally developed to offer accelerated depreciation for economic growth
Dt = dtB Where: Dt = depreciation charge for year t B = first cost or unadjusted basis dt = depreciation rate for year t (decimal)
Where: Dj = depreciation in year j ∑ Dj = all depreciation through year t
BVt = B - ∑Djj = 1
j = t
Get value for dt from IRS table for MACRS rates
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