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Learning Objectives
1.
2.
3.
4.
5.
Cost Recovery
Businesses must capitalize the cost of assets
with a useful life of more than one year on the
balance sheet rather than expense the cost
immediately
Also known as depreciation, amortization, or
depletion depending upon the underlying
nature of asset
Businesses use these methods to recover cost
of assets due to wear, tear and obsolescence of
assets
9-3
Cost Recovery
9-4
Cost Recovery
Cost Recovery
9-6
Basis Example
Neckflix Inc., a necktie subscription service,
purchased an old warehouse for $175,000 for
use in expanding its current operations. An
additional $15,000 was spent remodeling the
building in preparation for its opening.
Two years later, a Neckflix employee discovered
that several leaks in the roof were causing
serious water damage to the neckties in
inventory; the company spent $50,000 to re-roof
the building.
Every six months, Neckflix pays $500 to have
the carpet professionally cleaned.
9-7
Depreciation-Tangible
property
9-8
Depreciation
9-9
Depreciation
9-10
Depreciation
Depreciation Method
Default method
Generates the largest depreciation expense in the early years of the assets lives.
9-11
Depreciation
9-12
Depreciation
9-13
Depreciation
9-14
Depreciation
Depreciation
conventions
Half-year convention
(2) Rate
14.29%
14.29
20.00
Assume that Teton sells all of its office furniture in year 2 (the
year after it buys it). What is Teton's depreciation for the office
furniture in the year of disposition (year 2)?
Depreciation
MidQuarter Convention
9-17
Mid-Quarter convention
(Example 9-7/9-8)
Under this scenario, is Teton required to use the
mid-quarter convention? If so, what is the
depreciation amount in 2014 (year 1)?
Asset
Office furniture
Delivery truck
Machinery
Total personal
property
Date Acquired
2/3/14
8/17/14
10/25/14
9-18
Mid-Quarter convention
9-19
Mid-Quarter convention
(Example 9-10)
Under this scenario, is Teton required to use the mid-quarter
convention? If so, what is the depreciation amount in 2014?
Asset
Office furniture
Delivery truck
Machinery
Total personal
property
Date Acquired
2/3/14
8/17/14
10/25/14
Assume that Teton depreciates its personal property under the midquarter convention and that it sells its office furniture in the third quarter
of year 2. The office furniture ($10,000 original basis) was placed into
service during the first quarter of year 1 and has a seven-year recovery
period. What depreciation expense can Teton deduct for the office
furniture in year 2, the year of sale?
9-20
Depreciation
Real Property
Land is non-depreciable.
All properties are attached to the ground.
9-21
Midmonth convention
(Example 9-11)
Teton's basis in the warehouse it purchased
on May 1 of year 1 is $275,000. What is
Teton's year 1 depreciation on its
warehouse?
9-22
Depreciation
9-23
Midmonth convention
(Example 9-12)
Assume that Teton sells its warehouse on
March 5 in year 2 (the year after Teton buys it).
What is Teton's depreciation for the warehouse
in the year of disposition (year 2)? Teton's basis
in the warehouse it purchased on May 1 of year
1 is $275,000.
Special
Depreciation
9-25
Depreciation - Limits
of
179
deduction
9-26
179 deduction
(example 9-14/9-15)
During 2014, Teton placed into service $2,100,000 of
machinery, $10,000 of office furniture, and a $15,000 truck
for a total of $2,125,000 tangible personal property placed
in service for the year. What is Teton's maximum 179
expense after applying the phase-out limitation?
Also assume that Teton elects to claim the entire $375,000
expense and it chooses to apply it against the machinery.
Further assume that Teton reports $296,503 of taxable
income before deducting any 179 expense and
depreciation. What amount of total depreciation (including
179 expense) is Teton able to deduct on the machinery for
the year?
9-28
Depreciation
Bonus Depreciation
9-29
Depreciation
Luxury
automobiles
9-30
Auto depreciation
(adapted example 9-21)
What is the depreciation schedule for each model (assume mid-year convention)?
Year/Make
Model
Price
9-31
Amortization
9-32
Amortization
9-33
Amortization
9-34
Startup cost
9-36
Amortization
Research
9-37
Depletion
9-38
Depletion
9-39
Example 9-28
Ken's cost basis in the gold is the $150,000 he
paid for it. Based on a mining engineer's
estimate that the gold deposit probably holds
1,000 ounces of gold, Ken can determine his
cost depletion. What is Ken's cost depletion for
year 1 and year 2, assuming he extracts 300
and 700 ounces of gold in year 1 and year 2,
respectively?
Practice questions
Problems:
38,