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College
Accounting
College
Accounting
Heintz & ParryHeintz & Parry2020thth Edition Edition
Heintz & ParryHeintz & Parry2020thth Edition Edition
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Appendix: Depreciation Methods
Appendix: Depreciation Methods
55ChapterChapter
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1
Prepare a depreciation
schedule using the
straight-line method.
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Depreciation MethodsDepreciation Methods
• Straight-line
• Sum-of-the-years’-digits
• Double-declining-balance
• Modified Accelerated Cost Recovery System
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ExampleExample
For all illustrations in this appendix, we will assume that a delivery van was
purchased for $40,000. It has a five-year useful life and salvage value of $4,000.
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Straight-line MethodStraight-line Method
Under this method, an equal amount of depreciation will be taken each period.
STEP #1: Compute the depreciable cost.
COSTSALVAGE
VALUE =DEPRECIABLE
COST
$40,000 $4,000 = $36,000
–
–
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Straight-line MethodStraight-line Method
STEP #2: Divide the depreciable cost by the expected life of the asset.
Depreciation Expense per Year=
Depreciable CostYears of Life
$36,0005 years = $7,200
per year
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Straight-line MethodStraight-line Method
It is often convenient to use a depreciation rate per year.
Depreciation Rate per Year
=100%
Years of Life
100%5 years=20%
20% of the asset’s depreciable cost
will be recognized as Depreciation Expense each
year.
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Original Cost – Salvage Value ($40,000 – $4,000)
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
100% ÷ Years of Life(100% ÷ 5-year life)
20%
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Depreciable Cost × Depreciation Rate($36,000 × 20%)
20% $7,200
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Since this is the first year of the asset’s life, only this year’s depreciation has
accumulated.
20% $7,200 $7,200
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Cost – Accumulated Depreciation ($40,000 – $7,200)
20% $7,200 $7,200 $32,800
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Depreciable Cost does not change.
20% $7,200 $7,200 $32,800
2 $36,000
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Depreciation Rate does not change.
20% $7,200 $7,200 $32,800
2 $36,000 20%
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Depreciation Expense remains the same each year.
20% $7,200 $7,200 $32,800
2 $36,000 20% $7,200
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Now two years of depreciation has accumulated.
($7,200 + $7,200)
20% $7,200 $7,200 $32,800
2 $36,000 20% $7,200 $14,400
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Cost – Accumulated Depreciation($40,000 – $14,400)
20% $7,200 $7,200 $32,800
2 $36,000 20% $7,200 $14,400 $25,600
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Book Value declines over the life of the asset.
20% $7,200 $7,200 $32,800
2 $36,000 20% $7,200 $14,400 $25,600
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000 20%
× =
$7,200 $7,200 $32,800
2 $36,000 20% $7,200 $14,400 $25,600
3 $36,000 20% $7,200 $21,600 $18,400
4 $28,800$36,000 20% $7,200 $11,200
5 $36,000 20% $7,200 $36,000
The entire Depreciable Cost has now been recognized as Depreciation Expense.
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Straight-line Depreciation ScheduleStraight-line Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000 20%
× =
$7,200 $7,200 $32,800
2 $36,000 20% $7,200 $14,400 $25,600
3 $36,000 20% $7,200 $21,600 $18,400
4 $28,800$36,000 20% $7,200 $11,200
5 $36,000 20% $7,200 $36,000
Book Value now matches the Salvage Value.
$4,000
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2
Prepare a depreciation
schedule using the
sum-of-the-years’-
digits method.
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Sum-of-the-years’-digitsSum-of-the-years’-digits
• Depreciation is determined by multiplying the depreciable cost by a schedule of fractions.
• The numerator (top) of the fraction for a specific year is the number of years of remaining useful life.
• The denominator (bottom) of the fraction is determined by adding the digits of the years of the estimated life of the asset.
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Sum-of-the-years’-digitsSum-of-the-years’-digits
FORMULA:
DEPRECIABLE COST
Remember, Depreciable Cost = Original Cost – Salvage Value.
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Sum-of-the-years’-digitsSum-of-the-years’-digits
FORMULA:
DEPRECIABLE COST ×
YEARS REMAINING
This is measured from the beginning of the year. For example, to calculate the first year’s depreciation…we would say there are 5 years
remaining.
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Sum-of-the-years’-digitsSum-of-the-years’-digits
FORMULA:
DEPRECIABLE COST
×YEARS
REMAINING
5-YEAR LIFE = 5 + 4 + 3 + 2 + 1 OR 15 10-YEAR LIFE =
10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 OR 55
SUM-OF-THE-YEARS’-DIGITS
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Original Cost – Salvage Value($40,000 – $4,000)
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $36,000
× =
Original Cost – Salvage Value($40,000 – $4,000)
5/15
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Five years remaining divided by sum-of-years’-digits of 15
(5 + 4 + 3 + 2 + 1)
5/15
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
$36,000 × 5/15
5/15 $12,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
The sum-of-the-years’-digits method recognizeslarge amounts of depreciation in the first
year of the asset’s life and smaller amounts each subsequent year.
5/15 $12,000Year
Depreciable Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Only this first year of depreciation has accumulated so far.
5/15 $12,000 $12,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Original Cost – Accumulated Depreciation($40,000 – $12,000)
5/15 $12,000 $12,000 $28,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Depreciable Costdoes not change.
5/15 $12,000 $12,000 $28,000
2 $36,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Now there are four years remaining.
5/15 $12,000 $12,000 $28,000
2 4/15$36,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Since the rate (fraction) is smaller, the depreciation expense is also
smaller in the second year.
5/15 $12,000 $12,000 $28,000
2 4/15 $9,600$36,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
There are now two years of depreciation accumulated.
($12,000 + $9,600)
5/15 $12,000 $12,000 $28,000
2 $36,000 4/15 $9,600 $21,600
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000
Book Value falls as the asset ages.
5/15 $12,000 $12,000 $28,000
2 4/15 $9,600 $21,600 $18,400$36,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
5/15 $12,000 $12,000 $28,000
2 4/15 $9,600 $21,600 $18,400
3 3/15 $7,200 $28,800 $11,200
4 2/15 $4,800 $33,600 $6,400
5 2/15 $36,000
The entire depreciable cost has been recognized as Depreciation Expense.
$36,000
$36,000
$36,000
$36,000
$36,000 $2,400
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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Sum-of-the-years’-digits Depreciation ScheduleSum-of-the-years’-digits Depreciation Schedule
$36,000 5/15 $12,000 $12,000 $28,000
2 4/15 $9,600 $21,600 $18,400
3 3/15 $7,200 $28,800 $11,200
4 2/15 $4,800 $33,600 $6,400
5 2/15
Book Value now matches the Salvage Value.
$4,000
$36,000
$36,000
$36,000
$36,000 $2,400 $36,000
YearDepreciable
Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1
× =
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3
Prepare a depreciation
schedule using the
double-declining-
balance method.
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Double-declining-balance MethodDouble-declining-balance Method
• The book value is multiplied by a fixed rate
Often double the straight-line rate
• Once the book value is reduced to the expected salvage value, no more depreciation may be recognized.
• Similar to the sum-of-the-years’-digits depreciation method, larger amounts of depreciation are taken in the early years of the asset’s life.
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Double-declining-balance Method Double-declining-balance Method
FORMULA:
Book Value
Cost – Accumulated Depreciation = Book Value
For an asset’s first year depreciation,Book Value = Original Cost.
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Double-declining-balance Method Double-declining-balance Method
FORMULA:
Book Value
× (Straight-Line Rate)2
100% ÷ Useful LifeFor our example……
100% ÷ 5 years = 20%
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Original Cost – Accumulated Depreciation
($40,000 – $0)
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Double the Straight-Line Rate 2 × (100% ÷ 5) or 2 × 20%
40%
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Book Value × Double the Straight-Line Rate
($40,000 × 40%)
40% $16,000
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
The first year’s depreciation is all that has accumulated.
40% $16,000 $16,000
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Original Cost – Accumulated Depreciation
($40,000 – $16,000)
40% $16,000 $16,000 $24,000
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
The Book Value at the end of one year becomes the next year’s beginning
Book Value.
40% $16,000 $16,000 $24,000
2 $24,000
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
The rate will be the same every year (always double the straight-line rate).
40% $16,000 $16,000 $24,000
2 $24,000 40%
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Depreciation Expense will be smaller each year because the book value
is declining each year.
40% $16,000 $16,000 $24,000
2 $24,000 40% $9,600
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Two years’ depreciation has accumulated…
($16,000 + $9,600)
40% $16,000 $16,000 $24,000
2 $24,000 40% $9,600 $25,600
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Original Cost – Accumulated Depreciation
($40,000 – $25,600)
40% $16,000 $16,000 $24,000
2 $24,000 40% $9,600 $25,600 $14,400
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
$16,000 $16,000 $24,000
2 $24,000
Book Value can fall only to the amount of the Salvage Value. ($5,184 – $4,000 =
$1,184 to go!!)
40%
40% $9,600 $25,600 $14,400
3 $14,400 40% $5,760 $31,360 $8,640
4 $8,640 40% $3,456 $34,816 $5,184
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) RateDepreciation
Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
$16,000 $16,000 $24,000
2 $24,000
Book Value × Rate = $2,074. This would be too much depreciation. We can only
recognize $1,184.
40%
40% $9,600 $25,600 $14,400
3 $14,400 40% $5,760 $31,360 $8,640
4 $8,640 40% $3,456 $34,816 $5,184
5 $5,184 $1,184
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Double-declining-balance Depreciation ScheduleDouble-declining-balance Depreciation Schedule
Year
Book Value (Beginning of
Year) Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
$16,000 $16,000 $24,000
2 $24,000
Book Value has reached the Salvage Value.
40%
40% $9,600 $25,600 $14,400
3 $14,400 40% $5,760 $31,360 $8,640
4 $8,640 40% $3,456 $34,816 $5,184
5 $5,184 $1,184 $36,000 $4,000
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4
Prepare a depreciation
schedule for tax purposes
using the modified
accelerated cost recovery
system.
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Modified Accelerated Cost Recovery System Modified Accelerated Cost Recovery System
• Used for tax purposes
• The Internal Revenue Service (IRS) classifies various assets according to useful life and sets depreciation rates for each year of the asset’s life
• These rates are then multiplied by the cost of the asset
• Abbreviation: MACRS
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MACRS ExampleMACRS Example
A delivery van was purchased for $40,000. It has a five-year useful life
and salvage value of $4,000.
The IRS would give this van a six-year life and no salvage value.
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost RateDepreciation
Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
The IRS doesn’t allow a salvage value for this asset.
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost RateDepreciation
Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
The IRS sets the first-year rate at 20%.
20%
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost RateDepreciation
Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Cost × Rate ($40,000 × 20%)
20% $8,000
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost RateDepreciation
Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
Cost – Accumulated Depreciation($40,000 – $8,000)
20% $8,000 $8,000 $32,000
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
The IRS has a larger second-year rate.
20% $8,000 $8,000 $32,000
2 $40,000 32%
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
20% $8,000 $8,000 $32,000
2 $40,000 32% $12,800 $20,800 $19,200
3 $40,000 19.20%
Each year has a different rate.
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
20% $8,000 $8,000 $32,000
2 $40,000 32% $12,800 $20,800 $19,200
3 $40,000 19.20% $7,680 $28,480 $11,520
4 $40,000 11.52% $4,608 $33,088 $6,912
5 $40,000 11.52% $4,608 $37,696 $2,304
6 $40,000 5.76%
100%
At the end of the 6 years, 100% of the asset’s cost will have been recognized
as Depreciation Expense.
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MACRS Depreciation ScheduleMACRS Depreciation Schedule
Year Cost Rate
Depreciation Expense
Accumulated Depreciation (End of Year)
Book Value (End of Year)
1 $40,000
× =
20% $8,000 $8,000 $32,000
2 $40,000 32% $12,800 $20,800 $19,200
3 $40,000 19.20% $7,680 $28,480 $11,520
4 $40,000 11.52% $4,608 $33,088 $6,912
5 $40,000 11.52% $4,608 $37,696 $2,304
6 $40,000 5.76%
100%
$2,304 $40,000 $0
$40,000