Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Using MACRS, what is the
*******TABLES ATTACHED************
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Transcribed Image Text:**Table 17-5: Annual Recovery for MACRS**
This table presents the Modified Accelerated Cost Recovery System (MACRS) percentages for various asset classes. The values indicate the percentage of asset cost that can be recovered each year.
**Columns and Recovery Classes:**
- **Recovery Year**: Lists the number of years for asset recovery.
- **3-year class (200% D.B.)**: Values start at 33.00% and progressively decrease, indicating the percentage of asset cost recovered each year.
- **5-year class (200% D.B.)**: Begins at 20.00% and includes a switch to straight-line recovery, marked by an asterisk (*) in certain years (e.g., 15.00%*).
- **7-year class (200% D.B.)**: Starts with 14.28% in the first year and decreases annually.
- **10-year class (200% D.B.)**: Begins with 10.00% and decreases accordingly, with a switch to straight-line recovery at 6.55%*.
- **15-year class (150% D.B.)**: Starts at 5.00% and has a steady decrease with a switch to straight-line recovery at 5.90%*.
- **20-year class (150% D.B.)**: Begins at 3.75% with values decreasing to 3.00% in the sixteenth year.
**Notes:**
- *The asterisk (*) indicates when the switch from the declining-balance method to the straight-line method occurs.
- The percentages represent the accelerated depreciation method which allows for a faster recovery of an asset's cost in the early years, followed by smaller deductions later.
This table is essential for calculating depreciation in tax planning and determining the asset costs that can be recovered annually under the MACRS method.
Transcribed Image Text:**TABLE 17-4: Modified Accelerated Cost Recovery System (MACRS) for Assets Placed in Service After December 31, 1986**
This table provides an overview of the class recovery periods (or lifespans) and corresponding asset types under the MACRS for assets placed in service after December 31, 1986. The table is organized into two columns:
1. **Class Recovery Period (Life):**
- **3-year***:
- Assets include racehorses more than 2 years old, any horse (excluding racehorses) more than 12 years old at the time placed into service, and special tools for certain industries.
- **5-year***:
- Covers automobiles (not luxury), taxis, light general-purpose trucks, semiconductor manufacturing equipment, computer-based telephone central-office switching equipment, qualified technological equipment, and property used in connection with research and experimentation.
- **7-year***:
- Includes railroad track, single-purpose agricultural (pigpens) or horticultural structures, fixtures, equipment, and furniture.
- **10-year**:
- No specific property is mentioned under this class in the new law.
- **15-year†**:
- Comprises municipal wastewater treatment plants, telephone distribution plants, and comparable equipment used for two-way exchange of voice and data communications.
- **20-year†**:
- Includes municipal sewers.
- **27.5-year†**:
- Pertains to only residential rental property.
- **31.5-year†**:
- Applicable to only nonresidential real property.
2. **Asset Types:**
- Details specific assets and industries applicable for each recovery period.
**Footnotes:**
- *These classes use a 200% declining-balance method switching to the straight-line method.
- †These classes use a 150% declining-balance method switching to the straight-line method.
- ‡These classes use a straight-line method.
The table is useful for determining appropriate depreciation schedules and compliance with tax regulations based on the asset type and usage.
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