9.2 What is Depreciation and how is computed?

Iphone example for the first year

(1200 - 0) * 2 = * 1/3 = 800 first year depreciation Net Book Value: 400

iPhone example third year

(1200 - 266.66) * 2 *1/3 = 622.22

iPhone Example Second year

(1200 - 800) *2 * 1/3 = 266.66

Lets say I have a car that's cost is 30,000 (Lets say its a Tesla) At the end of 15 years my car will be worth 1,000 (residual value) Its useful life is 200,000 miles

(30,000 - 1,000) / 200,000 = $.15 Cents per mile (.15 cents * 41,000 Miles used for the fist year) = 6,150 depreciated this year

Double Decling Balance Method

(Cost - Accumulated depreciation) * 2 * (1/useful life)

Less - Accumulated Depreciation

(Minus) -

The depreciation of an PLANT asset is based on

1. Capitalized cost (Costs of running the item) 2. Residual Value (End value after its estimated useful life) 3. Estimated Useful life (How long the asset will last) How do we connect these items together? How long will my item last? How much will it be worth? And what will it cost to start this asset? Beginning, time, value

Three types of methods used to calculate depreciation

1. Straight line method 2. Units of production method 3. Double declining balance method

Depreciation is not

1. The process of valuation (depreciation does not change in relativity to the assets market value) 2. Depreciation doesn't not mean a business replaces an item using cash Depreciation has nothin to do with cash

What was my iPhone XR Worth when I bought it? What was the estimated residual value after I traded it in? What is my Depreciable cost? (Cost - Residual Value)

1200 (cost) 400 (Residual value - 3 years of useful life) 800 (My iPhone XR depreciable cost was nearly $800)

On January 1, Alamo Cranes purchased a crane for $140,000. Alamo expects the crane to remain useful for six years (1,000,000 lifts) and to have a residual value of $2,000. The company expects the crane to be used for 80,000 lifts the first year. Compute the first-year depreciation expense on the crane using the following methods: a. Straight-line b. Units-of-production (Round depreciation per unit to two decimals. Round depreciation expense to the nearest whole dollar.) Compute the first-year and second-year depreciation expense on the crane using the following method: c. Double-declining-balance (Round depreciation expense to the nearest whole dollar.)

140,000 purchase price of crane 6 (or 1 million lifts) years useful life 2,000 Residual Value 80,000 lifts first year A. Straight Line Method (Cost - Residual Value) / Useful life 140,000 - 2,000 / 1,000,000 miles .138 B. Units of production Method Step 1: (cost - Residual Value) = Depreciated Value Step 2: Units of production depreciation = (Depreciation per unit * Current year usage) 0.138 * 80,000 =11,040 C. Double Declining Balance Cost - Accumulated Depreciation (140,000 - 0) *2 (1/6) = 46,666.67 (1st year) (140,000 - 46,666.67) * 2 (1/6) = 31,111.33 (2nd year)

Type of method: Accelerated Depreciation Method

A depreciation method that expenses more of its accumulated depreciation near the beginning of the useful life rather than near the end

What is the Modified Accelerated Cost Recovery System (MACRS) used for?

A depreciation method that is used for tax purposes.

Purposes of each method Straight Line method - Units of Production - Double Declining Balance -

Generates Revenue evenly over time, Equal Amounts over time, building Depreciate due to wear and tear rather than obsolesce, More usage uses larger depreciation, vehicles (Miles) or Machines (hours) Produces more revenue in early years, Higher depreciation in early years, less later, computers

Modified Half Convention explain this

If the asset is purchased on or before the 15th of the month the asset will be depreciated for the entire month

So what happens to our methods if we buy an asset mid year? (July 1 instead of Jan 1)

In this situation we will use a partial year depreciation

Straight Line Method: Straight line depreciation = (Cost - Residual value) / Useful life = ($41,000 - $1,000) / 5 years = $8,000 per year

Iphone XR example" (1200 - 400) / 3 = $266.66 Per Year How journalize: Iphone XR Expense - $266.66 (DEBIT) Accumulated Depreciation IPHONE - $266.66 (CREDIT) To record depreciation on phone

How to record on balance sheet:

Iphone XR. (1200) Less - Accumulated Depreciation. (266.66) Iphone XR, Net (933.34) (First year)

Give me some examples of obsolete technology

Kodak cameras, Apple iPod gen 1, Caset tapes, Record Players, these items are obsolete and novel

Is MACRS is accordance to common accounting practices? (Booking)

No, MACRS does not follow accounting principles in the GAAP

Unit of production method is based on what factor?

Output of an asset, such as its milage, or hours, or units produced

Revised Depreciation

Revised depreciation = (Book value - Revised residual value) / Revised useful life remaining = ($25,000 - $1,000) / 6 years = $4,000 per year

Whats another term for Residual Value? Think Vultures

Salvage Value

How do I caculate my depreciation for United of production method?

Step 1: Depreciation per unit = (cost - residual value) / Useful life in units Step 2: Units of production depreciation = (Depreciation per unit * Current year usage)

Partial Year Depreciation

Straight-line depreciation = [(Cost - Residual value) / Useful life] * (Number of months / 12 months) = [($41,000 - $1,000) / 5 years] * (6 / 12) = $4,000

(933.34) is my

book value - Book value will decrease each year, until I finally reach my residual value

Obsolete

out-of-date, no longer in use