chapter4 - Farm Management Chapter 4 Depreciation and Asset...

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Farm Management Chapter 4 Depreciation and Asset Valuation (Plus some material on fixed costs)
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farm management chapter 4 2 Fixed Costs in Agriculture Fixed costs in agriculture are normally very high. This is why farmers frequently produce at a loss.
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farm management chapter 4 3 Ownership Costs Many fixed costs are associated with owning items. Ownership costs are sometimes called the “DIRTI-5”
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farm management chapter 4 4 DIRTI-5 Depreciation Interest Repairs Taxes Insurance
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farm management chapter 4 5 Depreciation Defined as the annual loss in value of durable assets due to use, wear, tear, age, and obsolescence A business expense that reduces annual profit A reduction in the value of an asset
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farm management chapter 4 6 Depreciation Definition Depreciation is the loss of an asset’s value caused by use, age, or obsolescence.
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farm management chapter 4 7 Purpose of depreciation Depreciation is an accounting procedure that spreads the original cost of a durable item over its useful life. Depreciation is a tax-deductible business expense.
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farm management chapter 4 8 Assets that May Be Depreciated a useful life of more than one year a determinable useful life but not an unlimited life a use in business Examples: vehicles, machinery, equipment, building, fences, purchased breeding livestock, wells. Land is not depreciable, but some improvements to land (e.g. drains) are depreciable.
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farm management chapter 4 9 Depreciation Terms Cost : the price paid for the asset Useful life : number of years the asset is expected to be used in business Salvage value : expected market value of the asset at the end of its useful life Book value : the asset’s original cost less accumulated depreciation
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farm management chapter 4 10 Useful Life When determining the useful life of an object (for your own records), consider how often you will use it, how old it is when acquired, how often you’ll repair it, the climate, normal technical progress, your experience with similar property.
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farm management chapter 4 11 How to Choose a Depreciation Method For tax purposes: The IRS has explicit rules. For your own records: Use a method that reflects the actual loss in value of the item over time.
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farm management chapter 4 12 BASIS The basis is an asset's value for tax purposes at a point in time. At the time of purchase, it is called a beginning tax basis . When this value changes, it is called an adjusted tax basis . Any asset purchased for cash, whether new or used, has a beginning tax basis equal to its purchase price.
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farm management chapter 4 13 Trades
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This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.

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chapter4 - Farm Management Chapter 4 Depreciation and Asset...

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