AIPB Mastering Depreciation

Under any GAAP depreciation method, the maximum depreciation permitted over the asset's life is ....

$245,000

MACRS

- Do not include residual/salvage value - years to depreciated define by IRS no by company - 5 years depreciation computer, office equipment, and auto - 7 years depreciation equipment, furniture

Sec 179

- reduce machine/equipment in $250.000 first year. - reduce vehicle over 6000 pounds in $25.000 first year - not apply to building - not use reduction if generate loss from company. - apply to new or use machine/auto

depreciation RATE - Double method

1 / estimate life X 200%. No change during year

How to compute depreciation expense under DDB

1.00 / 5 years (estimated life) = 20% straight-line rate x 200% = 40% DDB To compute depreciation for Year 1 $ book value x 40% = $ Depreciation

How to compute annual depreciation using a depreciation rate:

1.00 / estimated life = depreciation rate depreciable base x depreciation rate = annual depreciation expense

depreciation RATE - Straight line method

100% / estimate life. No change during year

What is Depreciation ?

A system of allocating the cost of fixed assets over their estimated life.

depreciation RATE - Unit of production

Base (cost - residual) / estimate TOTAL unit.miles, hours machine/vehicle will produce/use. No change during year.

Computing Book Value

Book value, or net book value, does not represent an asset's fair market value. Instead, it represents the undepreciated cost of the asset as it appears on the company's books and balance sheet. Book value is the acquisition cost less accumulated depreciation (accumulated depreciation is all depreciation expense taken

How is Straight-Line Method computed ?

Can be computed in one of two ways: The first way is the easiest. Simply divide the depreciable base by the estimated life: Original cost-residual value=base The second way is to compute an annual depreciation rate: 1.00/years of estimated life = annual depreciation rate ( % of depreciable base taken for depreciation) Annual depreciation rate x depreciable base = annual depreciation expense.

Declining Balance (DB)

The DB method is different from the SL, units of production (UOP) or sum-of-the-years'-digits methods because the depreciation rate is multiplied by the book value, not the depreciable base. Because the book value declines each year, it is called the declining balance method.

depreciation base - SL, Unit and Sum method

Cost of asset less residual value

What is the journal entry to record the purchase of the machine?

Debit Asset-Machine Credit Cash

The adjusting entry to record $5,000 of depreciation expense in the general ledger is ?

Debit Depreciation Expense Credit Accumulated Depreciation

If a nonmanufacturing company can take $5,000 in depreciation for the year, what is the journal entry to record the depreciation?

Debit Depreciation Expense Credit Accumulated Depreciation-Equipment

Journal entry to manufacture

Debit INVENTORY - working in process and credit Accumulate depreciation

If a manufacturing company can take $5,000 in depreciation for a machine used totally for the production of inventory, what is the journal entry to record the depreciation?

Debit Inventory-Work-In-Process OH Credit Accumulated Depreciation-Equipment

Journal entry to Non-manufacture

Debit depreciation EXPENSE and credit Accumulate depreciation

Which accounts can recording depreciation effect ?

Depreciation Expense, Accumulated Depreciation , and Inventory -Work in Process

Group Purchases The price of each asset in a group purchase is computed as ?

The acquisition cost is $6,000. Company estimates, or obtains from a formal appraisal the FMV if each asset, as follows: Assets FMV computer $4,000 Printer $1,000 copier $3,000 Total FMV $8,000 To compute the acquisition cost of the assets: 4,000 / 8000 = 0.5% X 6,000 = 3,000 acquisition cost

Macrs X GAAP

Depreciation using GAAP will be send to books Depreciation using MACRS will be use to calculate federal income tax CPA can use MACRS depreciation value on books if not material different.

vehicle

Employer can use 100% to vehicle use to business and perusal by employee if declare in W2 personal use. Employer can only take the % use in business

When a CPA performs an Audit ?

Examines the companies financial statements and expresses an opinion on whether they materially conform to GAAP rules.

MACRS specifies the depreciation method for depreciable assets, as follows:

For equipment and most land improvements (but not buildings), MACRS permits the straight-line or declining balance methods, but prohibits sum-of-the-years'-digits. Most companies choose declining balance to get the biggest expense (tax write-off) as soon as possible. For buildings, MACRS requires straight-line depreciation

A company that prepares its financial statements for a third party, such as a bank for potential investors, or for a company that may want to acquire it, must use what Depreciation Rule ?

GAAP

MARCS Half-Year Convention

Generally, for first-year depreciation of equipment and most land improvements, MACRS requires the half-year convention. This convention requires that all property (equipment and land improvements) be depreciated as if it were placed in service in the middle of the year, regardless of purchase date.

MACRS stipulates how much depreciation can be taken in the first year, regardless of purchase date.

Generally, for first-year depreciation of equipment and most land improvements, MARCS requires the half-year convention. This convention requires that all if it were laced in service in the middle of the year, regardless of purchase date. For depreciation of buildings, MACRS imposes the mid-month convention. This convention requires that buildings be depreciated as if purchased in the middle of the month, regardless of when actually purchased.

A company that prepares if financial statements for a tax return or will not be looked at by a third party can use which Depreciation Rule?

IRS Rules

If a company is required to have an audit of its financial statements then....

If GAAP depreciation is materially different form tax depreciation, the company must use the GAAP amount for its financial statements and the tax amount for its tax return.

How to get the denominator for the SYD Method

If there are 5 years in the assets lifes the sum of the digits is 15 (5+4+3+2+1). To save time in adding up digits shortcut is 5 x (5+1) / 2 = 15

How to get the Numerator for the SYD Method

If you are depreciating an asset with a 10 - year estimated life, The numerator to use at the end of Year 1 is 10 because that is the number of years remaining in the assets life as of the beginning of the first year . The numerator to use at the end of Year 2 is 9, because that is the number of years remaining in the asset's life.

How to compute the acquisition cost ?

Invoice cost plus all costs required to make the asset ready for its intended use. invoice cost sales tax delivery and installation costs = acquisition cost

MARCS Mid-month convention.

MACRS imposes the mid-month convention. This convention requires that buildings be depreciated as if purchased in the middle of the month, regardless of when actually purchased.

Is land depreciable ?

No

When a CPA performs a Compilation, they do what ?

Organizes financial data into Financial Statements Does NOT express an opinion on reliability of the statements or whether they conform to GAAP.

When a CPA performs a Review ?

Prepares a report describing their limited inspection of the financial statements and found NO MATERIAL differences from GAAP Rules.

Macrs - machine/equipment BONUS

Reduction of 50% apply only to NEW machine/equipment on first year

The straight-line (SL) method.

The asset is depreciated by dividing the depreciable base (acquisition cost-residual value) by the number of years in the estimated life to determine each year's depreciation expense. Thus, under SL, each year's depreciation expense is the same.

The Units of production (UOP) or units of output method.

The asset is depreciated each year according to the number of units produced, total hours used, total miles driven, or other measure of production. Thus, under UOP, the amount of annual depreciation fluctuates by output or use.

Depreciating Buildings Under MACRS

The cost basis of a building is the cost (Not including land) plus all additional costs required to put the building in service. Recovery periods for buildings are as follows: 27.5 years for residential rental property (Publication 946, Table 2). 39 years for nonresidential (commercial) property such as offices, warehouses, and factories (Publication 96, Table 3). Note that there is no bonus depreciation permitted for buildings. Both Tables 2 and 3 use the straight-line method, and each month's rate has the mid-month convention factored in. Thus, the task in depreciating buildings is simply finding the right table.

A company can use tax rules on their financial statements if...

The difference between GAAP and IRS Rules is not material.

MACRS

The entire acquisition cost is depreciated - there is no residual value. The IRS (not the company) determines the asset's life (recovery period). Most assets, other than real-estate, have a 5 year or 7 year recovery period, as follows: 5 - year recovery period. includes computers and peripherals (machines controlled by the computer), automobiles, trucks, office machinery, typewriters, copiers, and adding machines. 7 - year recovery period. Includes office furniture and fixtures such as desks, files, chairs, safes and most equipment.

Mid-Quarter Convention

The mid-quarter convention overrides the half-year convention when more than 40% of the aggregate basis of the equipment purchased total acquisition cost for tax purposes less any Sec. 179 deduction is purchased in the last 3 months of the taxable year. It does not apply to residential or nonresidential buildings, but may apply to some improvements to land.

Double- Declining Balance (DDB)

The most widely used rate is 200%, referred to as the DDB methods because it is double the straight-line rate. Whatever rate a company selects must be used over the entire life of the assets. Under DDB, multiply the depreciation rate by the book value-not the depreciable cost as in the straight-line and units of production methods. The total depreciation permitted for an asset, however, is limited to the depreciable base as in the other methods. To put it another way, the asset cannot be depreciated below its residual value, as in the other methods.

Who determines the asset's residual value or scrap value or salvage value?

The residual value in an estimate made by company management of the dollar amount that can be recovered for the asset at the end of its useful life when it is disposed of (sold or traded in). this amount cannot be depreciated.

Which depreciation method is not based on the number of accounting periods in which an asset is used

The units of production method is based on an asset's usage and not on the number of periods (years, quarters, etc.) in which the asset is used.

The Accelerated methods.

There are two methods of accelerated depreciation. They are called accelerated because they provide more annual depreciation expense in the earlier years of the asset's life and less depreciation expense in the later years. The two accelerated methods are the declining balance (DB) method and the sum-of-the-years'-digits (SYD) method.

Sum of year method

To compute deprecation multiply the depreciable base by the depreciation rate. Under SYD, the depreciation rate is a fraction that is used as follows: Numerator / Denominator = Years remaining in asset's life / SYD = depreciation rate Numerator: Years remaining in the assets life as of the beginning of the year. if you are depreciating calculate 12 consecutive months even if that results in same rate being use in two different calendar year

What is the Purpose of Depreciation ?

To spread out the cost of the asset over the years, to match that assets cost with the revenue it helps generate each year.

Many of the concepts underlying tax depreciation rules are similar to the concepts underlying GAAP depreciation rules. true or false

True

How to compute the depreciable base:

acquisition cost - residual value = Depreciable base

Mid Quarter

apply to purchase that excess more then 40% in last 3 months

Accumulated Depreciation is a ________________ _____________ account.

balance sheet The balance in this account shows total depreciation expense taken in all years to date.

macrs - non/residential

calculate % present in the month of purchase from mid month table. if company has calendar in different than Dec, for example, march and purchase blinding in Set. Use percentage of 6 months ( Mar to Set = 6 months )

How to compute annual depreciation using years:

depreciable base / years = annual depreciation expense

Sum of year method

depreciation rate CHANGE every year.

Unit produced method

depreciation rate CHANGE every year. Use quantity of unit produce during year. Calculate base deprecation ( original cost - residual) / Total quantity produce year x quantity of unit produce. Debit inventory - working in process (except vehicle)

Straight line method

depreciation rate did NOT change. Use same rate from all year of depreciation. Calculate base deprecation ( original cost - residual) / years of estimate life or 1.00 / years (estimated life)

Double declining method

depreciation rate did NOT change. Use same rate from all year of depreciation. However, depreciation base will change ever year. Calculate (book value from begin of book ) x depreciation rate.

Financial statement s prepared for company management ____________ have to use GAAP depreciation rules.

do not

A company that wants a CPA to do a review of its financial statements depreciates its plant and equipment assets under GAAP for its federal income tax return ? true or false

false-a company that wants a CPA to do a review of its financial statements must depreciate its plant and equipment assets under GAAP only for its financial statements. Depreciation on the TAX RETURN must always use TAX RULES

For assets acquired during the year, the sum-of-years' digits method requires that the same depreciation rate be used.....

for 12 consecutive months, even if that results in the same rate being used on two different calendar years.

original cost

include cost of purchase, transportation, installation, sales tax, commission, insurance from delivery

Depreciation Expense is an ______________ ____________ account.

income statement the balance in this account will be presented with other expenses as depreciation expense.

Book value

is the acquisition total cost. first year is original cost (no include residual) , second year is original cost less accumulated depreciation from year 1 and year 2

The purpose of depreciation is to ______________ the asset's cost to the revenue that it helps the organization earn each year over its life.

match

If a company uses the tax depreciation amount on its financial statements, a CPA performing an audit will require the company to adjust depreciation expense if the difference between the tax amount and the GAAP amount is ____________________.

material

When MACRS, Table 1 depreciation for an auto or light SUV, pickup or van is in excess of annual IRS limits the excess depreciation...

may be taken by extending the MACRS recovery period for as many years as are needed to depreciate the cost basic.

Unit prod method

quantity of unit, miles or hours calculate per year. Did not matter what time equipment was purchase or place in service

A company is required to have an independent CPA audit its year-end financial statements if.....

the company must demonstrate that its financial statements conform with GAAP. The company's stock is publicly traded.

Macrs - vehicle

use depreciation that would present less value when compare to table

Mid Month

use for buildings. Calculate regardless when actually purchase

GAAP rules

which must be used to compute depreciation for the financial statements. GAAP depreciation rules are required for the financial statements because they more closely match an asset's cost with the revenue that the asset helps earn over its life. Many small companies that do not need audited financial statements use tax depreciation methods for both their tax return and their financial statements.

IRS rules

which must be used to compute depreciation for the tax return.