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Lecture 28 - The Most Taxing Questions or We Depreciate You

# 212486700000 570595 27730 year 9 0212486700000

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Unformatted text preview: \$27,730 Year 9 0.212486*(700,000 – 598,324) = \$21,788 Wait a Cotton Picken Minute Here - The truck was Wait dead at 7 years – how long does this depreciation go on on Answer – Till you are dead too (forever) Houston- We have a problem Houston Declining balance methods start out fine, Declining but going on forever makes no sense but Solution – Do a straight line calculation in Solution parallel with the declining balance calculation and switch when straight line is more is Implementation Implementation Year 1 SL = Book Value/ Remaining Life \$700,000/ 7 = \$100,000 Declining Balance says \$150,000 \$150,000 > \$100,000 – select declining balance Year 2 SL = \$550,000/ 6 = \$91,667 Declining Balance says \$117,857 \$117,857 > \$91,667 – select declining balance Year 3 SL = \$432,143/ 5 = \$86,439 Declining Balance says \$92,602 \$92,602 > \$86,439 – select declining balance Implementation Continued Implementation Year 4 SL \$339,541/4 = \$84,885 Declining Balance says \$72,759 \$84,885 > \$72,759 - switch to SL for rest of \$84,885 depreciation depreciation Thus Year 5 is \$84,885 Year 6 is \$84,885 Year 7 is \$84,885 Depreciation is done Things to Note Things Depreciation is funny money Money really moves like the cash flow Why do people use funny money? Accountants realized long ago that reporting profits and losses Accountants based on when big purchases occurred put earning all over the map – didn’t reflect how businesses asset position had changed changed Depreciation allowed accounted earnings and losses to show Depreciation how the companies performance changed its asset position how Why don’t we use them on cash flows We are valuing the earnings and investment of a project not We trying to put a value on the company every year trying We do things different because what we are trying to We do is different do The Funny Money Problem The Everyone understands why we need to depreciate long Everyone lived assets lived Getting people to agree on how to do it is another matter We have shown you 3 ways – and haven’t yet talked about We how we know how long the asset will last how Everyone and his dog has a different way of calculating Everyone profits pr...
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