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Construction Accounting: Depreciation Methods and IRS Rules, Slides of Construction

Iowa Wesleyan University (IW)Construction

This chapter from a construction accounting textbook covers various depreciation methods, including straight-line, sum-of-the-years'-digits, and declining balance. The document also discusses the modified accelerated cost recovery system (macrs) and irs recovery periods for different types of assets. Students will learn how to calculate depreciation using these methods and understand the rules for placing assets in service.

What you will learn

  • What are the IRS recovery periods for different types of construction assets?
  • How does the sum-of-the-years'-digits method accelerate depreciation compared to the straight-line method?
  • What are the three main depreciation methods discussed in the document?

Typology: Slides

2021/2022

Uploaded on 09/12/2022

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Construction Accounting and
Financial Management
Chapter 5
Depreciation
Purpose
Financial statements
Cost allocation of equipment
Taxes
Variables
P = Purchase price
F = Salvage Value
Zero for tax purposes
N= Recovery period (years)
Set by code for tax purposes
Variables
Rm= Percentage of depreciation taken in
year m
Dm= Depreciation for year m
BVm= Book value at the end of year m
Book value equals the purchase price less the
depreciation recorded to date
Straight-Line
Depreciates uniformly over the life of the
asset
Annual depreciation
Dm= (P–F)/N
Book Value
BVm= P–m(Dm)
-or-
BVm= BVm-1 –Dm
Straight-Line
m RmDm($) BVm($)
0 110,000
1 1/5 20,000 90,000
2 1/5 20,000 70,000
3 1/5 20,000 50,000
4 1/5 20,000 30,000
5 1/5 20,000 10,000
pf3
pf4

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Download Construction Accounting: Depreciation Methods and IRS Rules and more Slides Construction in PDF only on Docsity!

Construction Accounting and

Financial Management

Chapter 5

Depreciation

Purpose

 Financial statements

 Cost allocation of equipment

 Taxes

Variables

 P = Purchase price

 F = Salvage Value

 Zero for tax purposes

 N = Recovery period (years)

 Set by code for tax purposes

Variables

 Rm = Percentage of depreciation taken in

year m

 Dm = Depreciation for year m

 BVm = Book value at the end of year m

 Book value equals the purchase price less the

depreciation recorded to date

Straight-Line

 Depreciates uniformly over the life of the

asset

 Annual depreciation

Dm = ( P – F )/ N

 Book Value

BVm = P – m ( Dm )

-or-

BVm = BVm-1 – Dm

Straight-Line

m Rm Dm ($) BVm ($)

Sum-of-the-Years

 Accelerates depreciation

 Annual depreciation

Dm = (P – F)Rm

Rm = ( N – m + 1)/ SOY

SOY = N(N + 1)/

 Book Value

BVm = BVm-1 – Dm

Sum-of-the-Years

m Rm Dm ($) BVm ($)

Declining-Balance Method

 Accelerates depreciation

 Annual depreciation

Dm = (BVm-1)Rm

 Rm = 2.00/N for 200% declining-balance
 Rm = 1.50/N for 150% declining-balance

 Book Value

BVm = BVm-1 – Dm

Declining-Balance Method

 Does not automatically reach salvage value

 Must stop depreciation at salvage value when

book value goes below salvage value

  • or -

 Must switch to straight-line depreciation when

the straight-line depreciation for the

remaining years is greater than declining-

balance depreciation

Stopping at Salvage Value ($20,000)

$

$20,

$40,

$60,

$80,

$100,

$120,

0 1 2 Year 3 4 5
Declining Balance
Stopping at the
Salvage Value

Switching to Straight Line (SV = 0)

$

$20,

$40,

$60,

$80,

$100,

$120,

0 1 2 3 4 5

Year
Declining Balance
Straight Line

Section 179

 Can expense up to $250,000 (for 2009) of

equipment without depreciation

 Deduction is reduced if you place more than

$800,000 of Section 179 property in services

during the year