7.01_econ_7 - Depreciation and Corporate Taxes Chapter 9 1...

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1   ©M Pore  -  7.01  -  econ 7.ppt Depreciation and Depreciation and                             Corporate Taxes Corporate Taxes                                                           Chapter 9 Chapter 9
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2   ©M Pore  -  7.01  -  econ 7.ppt •  Definition :  Loss of value for a fixed asset •  Example : You purchased a car worth                        $15,000 at  the beginning of year 2000.  Depreciation End of  Year Market  Value Loss of  Value 0 1 2 3 4 5 $15,000 10,000 8,000 6,000 5,000 4,000 $5,000 2,000 2,000 1,000 1,000 Depreciation
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3   ©M Pore  -  7.01  -  econ 7.ppt Classification of Types of Depreciation
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4   ©M Pore  -  7.01  -  econ 7.ppt Why Do We Consider Depreciation? Gross Income -Expenses: (Cost of goods sold) ( Depreciation ) (operating expenses) Taxable Income - Income taxes Net income (profit) Business  Expense Depreciation  is  viewed as a part  of business  expenses that  reduce taxable  income.
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5   ©M Pore  -  7.01  -  econ 7.ppt Depreciation Concept   Economic Depreciation Purchase Price  –  Market Value (Economic losses due to both physical  deterioration and technological  obsolescence)   Accounting Depreciation A systematic allocation of the cost basis  over a period of time.
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6   ©M Pore  -  7.01  -  econ 7.ppt Factors to Consider in Asset Depreciation   Depreciable life ( how long? )  Salvage value ( disposal value )  Cost basis ( depreciation basis )  Method of depreciation ( how? )
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7   ©M Pore  -  7.01  -  econ 7.ppt What Can Be Depreciated?   Assets used in business  or held for production of  income  Assets having a definite useful life  and a life longer  than     one  year  Assets that must wear out , become obsolete or lose  value   A qualifying asset for depreciation must satisfy 
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8   ©M Pore  -  7.01  -  econ 7.ppt Cost of a new hole-punching  machine (Invoice price) $62,500 + Freight 725 + Installation labor 2,150 + Site preparation 3,500 Cost basis to use in depreciation  calculation $68,875 Cost Basis
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9   ©M Pore  -  7.01  -  econ 7.ppt Old hole-punching machine (book value) $4,000      Less:  Trade-in allowance 5,000 Unrecognized gains $1,000 Cost of a new hole-punching machine $62,500     Less: Unrecognized gains (1,000) Freight 725 Installation labor 2,150 Site preparation 3,500 Cost of machine (cost basis) $67,875 Cost Basis with Trade-In Allowance
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10   ©M Pore  -  7.01  -  econ 7.ppt Asset Depreciation Range (years) Assets Used Lower Limit Midpoint  Life Upper  Limit Office furniture, fixtures, and equipment 8 10 12 Information systems (computers) 5 6 7 Airplanes 5 6 7 Automobiles, taxis 2.5 3 3.5 Buses 7 9 11 Light trucks 3 4 5 Heavy trucks (concrete ready-mixer) 5 6 7
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7.01_econ_7 - Depreciation and Corporate Taxes Chapter 9 1...

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