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chapter_11_depreciation - Chapter 11 Depreciation Copyright...

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Copyright Oxford University Press 2009 Chapter 11 Depreciation
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Copyright Oxford University Press 2009 Basic Aspects of Depreciation Historical Depreciation Methods Modified Accelerated Cost Recovery System (MACRS) Depreciation and Asset Disposal Unit-of-Production Depreciation Depletion Spreadsheets and Depreciation Chapter Outline
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Copyright Oxford University Press 2009 Understand the concepts of depreciation, deterioration, and obsolescence Use historical and MACRS to calculate annual depreciation charge and book value over the asset’s life Account for capital gains/losses, ordinary losses, and depreciation recapture due to the disposal of a depreciated asset Use unit-of-production and depletion depreciation methods in economic analysis Use spreadsheets to calculate depreciation Learning Objectives
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Copyright Oxford University Press 2009 In 2001, major league baseball (MLB) had over $3.5 billion revenues. Yet, the commissioner asserted that baseball had suffered a loss of over $200 million for the year. Vignette: Is Baseball Going Broke? Owners of baseball teams deduct stadium depreciation as much as $5 million. How would this affect their calculations? IRS considers “Barry Bonds” a “wasting asset” and allows the owner to depreciate a large portion of his contract. Why?
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Copyright Oxford University Press 2009 Decline in market value of an asset due to deterioration or obsolescence Decline in value of an asset to its owner Systematic allocation of an asset’s cost over its useful or depreciable life (accountant’s definition) Basic Aspects of Depreciation
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Copyright Oxford University Press 2009 Expenses: Part of regular business operations “Consumed” over short period of time Sometimes recurring Do not lose value gradually over time Subtracted from business revenues as they occur Reduce income taxes as they can be written off when they occur Examples: labor, utilities, materials, insurance,… Depreciation and Expenses
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Copyright Oxford University Press 2009 Depreciation: Business costs due to capital assets are not fully written off when they occur Capital assets lose value gradually over time Capital cost must be written off or depreciated over its depreciable life or recovery period Reduce the taxable income, and thus reduce income taxes as they were written off It is a non-cash cost Examples: building, plants, machines,… Depreciation and Expenses
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Copyright Oxford University Press 2009 A property is depreciable If: The property must be used for business purposes to produce income. The property must have a useful life that can be determined, and the useful life must be longer than one year.
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