AIPB Mastering Depreciation

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1. The adjusting entry to record Debit Depreciation Expense

$5,000 of depreciation ex- Credit Accumulated Depreciation
pense in the general ledger is
?

2. When a CPA performs a Re- Prepares a report describing their limited

view ? inspection of the financial statements and
found NO MATERIAL differences from GAAP
Rules.

3. What is Depreciation ? A system of allocating the cost of fixed assets

over their estimated life.

4. A company that prepares if fi- IRS Rules

nancial statements for a tax
return or will not be looked at
by a third party can use which
Depreciation Rule?

5. A company that prepares its GAAP

financial statements for a
third party, such as a bank
for potential investors, or for
a company that may want to
acquire it, must use what De-
preciation Rule ?

6. When a CPA performs an Au- Examines the companies financial state-

dit ? ments and expresses an opinion on whether
they materially conform to GAAP rules.

7. When a CPA performs a Com- Organizes financial data into Financial State-
pilation, they do what ? ments Does NOT express an opinion on re-
liability of the statements or whether they
conform to GAAP.

8. Is land depreciable ? No

9. Which accounts can record- Depreciation Expense, Accumulated Depre-

ing depreciation effect ? ciation , and Inventory -Work in Process
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10. A company can use tax rules The difference between GAAP and IRS
on their financial statements Rules is not material.
if...

11. A company that wants a CPA false-a company that wants a CPA to do a
to do a review of its finan- review of its financial statements must depre-
cial statements depreciates ciate its plant and equipment assets under
its plant and equipment as- GAAP only for its financial statements. De-
sets under GAAP for its feder- preciation on the TAX RETURN must always
al income tax return ? true or use TAX RULES
false

12. Many of the concepts under- True

lying tax depreciation rules
are similar to the concepts
underlying GAAP deprecia-
tion rules. true or false

13. What is the Purpose of Depre- To spread out the cost of the asset over the
ciation ? years, to match that assets cost with the
revenue it helps generate each year.

14. If a company is required to If GAAP depreciation is materially different

have an audit of its financial form tax depreciation, the company must use
statements then.... the GAAP amount for its financial statements
and the tax amount for its tax return.

15. The purpose of depreciation match

is to ______________ the as-
set's cost to the revenue that
it helps the organization earn
each year over its life.

16. A company is required to the company must demonstrate that its fi-
have an independent CPA au- nancial statements conform with GAAP. The
dit its year-end financial state- company's stock is publicly traded.
ments if.....

17. do not
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Financial statement s pre-
pared for company manage-
ment ____________ have to
use GAAP depreciation rules.

18. If a company uses the material

tax depreciation amount on
its financial statements, a
CPA performing an au-
dit will require the com-
pany to adjust deprecia-
tion expense if the differ-
ence between the tax amount
and the GAAP amount is
____________________.

19. The straight-line (SL) method. The asset is depreciated by dividing the de-
preciable base (acquisition cost-residual val-
ue) by the number of years in the estimated
life to determine each year's depreciation
expense. Thus, under SL, each year's depre-
ciation expense is the same.

20. The Units of production The asset is depreciated each year accord-
(UOP) or units of output ing to the number of units produced, total
method. hours used, total miles driven, or other mea-
sure of production. Thus, under UOP, the
amount of annual depreciation fluctuates by
output or use.

21. The Accelerated methods. There are two methods of accelerated de-
preciation. They are called accelerated be-
cause they provide more annual deprecia-
tion expense in the earlier years of the as-
set's life and less depreciation expense in the
later years. The two accelerated methods are
the declining balance (DB) method and the
sum-of-the-years'-digits (SYD) method.

22. Computing Book Value

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Book value, or net book value, does not rep-
resent an asset's fair market value. Instead,
it represents the undepreciated cost of the
asset as it appears on the company's books
and balance sheet. Book value is the ac-
quisition cost less accumulated depreciation
(accumulated depreciation is all depreciation
expense taken

23. Which depreciation method is The units of production method is based on

not based on the number of an asset's usage and not on the number of
accounting periods in which periods (years, quarters, etc.) in which the
an asset is used asset is used.

24. What is the journal entry to Debit Asset-Machine

record the purchase of the Credit Cash
machine?

25. If a nonmanufacturing com- Debit Depreciation Expense

pany can take $5,000 in de- Credit Accumulated Depreciation-Equip-
preciation for the year, what is ment
the journal entry to record the
depreciation?

26. If a manufacturing company Debit Inventory-Work-In-Process OH

can take $5,000 in deprecia- Credit Accumulated Depreciation-Equip-
tion for a machine used totally ment
for the production of invento-
ry, what is the journal entry to
record the depreciation?

27. How is Straight-Line Method Can be computed in one of two ways:

computed ? The first way is the easiest. Simply divide the
depreciable base by the estimated life:
Original cost-residual value=base
The second way is to compute an annual
depreciation rate: 1.00/years of estimated life
= annual depreciation rate ( % of depreciable
base taken for depreciation)

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Annual depreciation rate x depreciable base
= annual depreciation expense.

28. How to compute the acquisi- Invoice cost plus all costs required to make
tion cost ? the asset ready for its intended use.
invoice cost
sales tax
delivery and installation costs
= acquisition cost

29. How to compute the deprecia- acquisition cost - residual value =

ble base: Depreciable base

30. How to compute annual de- depreciable base / years = annual deprecia-
preciation using years: tion expense

31. How to compute annual de- 1.00 / estimated life = depreciation rate
preciation using a deprecia- depreciable base x depreciation rate = annu-
tion rate: al depreciation expense

32. MACRS The entire acquisition cost is depreciated -

there is no residual value.
The IRS (not the company) determines the
asset's life (recovery period). Most assets,
other than real-estate, have a 5 year or 7 year
recovery period, as follows:
5 - year recovery period. includes computers
and peripherals (machines controlled by the
computer), automobiles, trucks, office ma-
chinery, typewriters, copiers, and adding ma-
chines.
7 - year recovery period. Includes office furni-
ture and fixtures such as desks, files, chairs,
safes and most equipment.

33. MACRS specifies the depreci- For equipment and most land improvements
ation method for depreciable (but not buildings), MACRS permits the
assets, as follows: straight-line or declining balance methods,
but prohibits sum-of-the-years'-digits. Most
companies choose declining balance to get
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the biggest expense (tax write-off) as soon
as possible.

For buildings, MACRS requires straight-line

depreciation

34. MACRS stipulates how much Generally, for first-year depreciation of equip-
depreciation can be taken in ment and most land improvements, MARCS
the first year, regardless of requires the half-year convention. This con-
purchase date. vention requires that all if it were laced in
service in the middle of the year, regardless
of purchase date.

For depreciation of buildings, MACRS im-

poses the mid-month convention. This con-
vention requires that buildings be depreciat-
ed as if purchased in the middle of the month,
regardless of when actually purchased.

35. Double- Declining Balance The most widely used rate is 200%, referred
(DDB) to as the DDB methods because it is double
the straight-line rate. Whatever rate a compa-
ny selects must be used over the entire life of
the assets.

Under DDB, multiply the depreciation rate by

the book value-not the depreciable cost as
in the straight-line and units of production
methods. The total depreciation permitted for
an asset, however, is limited to the deprecia-
ble base as in the other methods. To put it
another way, the asset cannot be depreciat-
ed below its residual value, as in the other
methods.

36. Declining Balance (DB) The DB method is different from the

SL, units of production (UOP) or
sum-of-the-years'-digits methods because
the depreciation rate is multiplied by the book

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value, not the depreciable base. Because the
book value declines each year, it is called the
declining balance method.

37. How to compute depreciation 1.00 / 5 years (estimated life) = 20%

expense under DDB straight-line rate x 200% = 40% DDB
To compute depreciation for Year 1
$ book value x 40% = $ Depreciation

38. How to compute depreciation

for under MACRS

39. Depreciating Buildings Under The cost basis of a building is the cost (Not
MACRS including land) plus all additional costs re-
quired to put the building in service. Recov-
ery periods for buildings are as follows:
27.5 years for residential rental property
(Publication 946, Table 2).

39 years for nonresidential (commercial)

property such as offices, warehouses, and
factories (Publication 96, Table 3).
Note that there is no bonus depreciation per-
mitted for buildings.
Both Tables 2 and 3 use the straight-line
method, and each month's rate has the
mid-month convention factored in. Thus, the
task in depreciating buildings is simply find-
ing the right table.

40. When MACRS, Table 1 depre- may be taken by extending the MACRS re-
ciation for an auto or light covery period for as many years as are need-
SUV, pickup or van is in ex- ed to depreciate the cost basic.
cess of annual IRS limits the
excess depreciation...

41. Depreciation Expense income statement

is an ______________
____________ account. the balance in this account will be present-

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ed with other expenses as depreciation ex-
pense.

42. Accumulated Depreciation balance sheet

is a ________________
_____________ account. The balance in this account shows total de-
preciation expense taken in all years to date.

43. IRS rules which must be used to compute depreciation

for the tax return.

44. GAAP rules which must be used to compute deprecia-

tion for the financial statements. GAAP de-
preciation rules are required for the finan-
cial statements because they more closely
match an asset's cost with the revenue that
the asset helps earn over its life. Many small
companies that do not need audited financial
statements use tax depreciation methods for
both their tax return and their financial state-
ments.

45. Who determines the asset's The residual value in an estimate made by
residual value or scrap value company management of the dollar amount
or salvage value? that can be recovered for the asset at the
end of its useful life when it is disposed of
(sold or traded in). this amount cannot be
depreciated.

46. Mid-Quarter Convention The mid-quarter convention overrides the

half-year convention when more than 40%
of the aggregate basis of the equipment pur-
chased total acquisition cost for tax purposes
less any Sec. 179 deduction is purchased
in the last 3 months of the taxable year. It
does not apply to residential or nonresiden-
tial buildings, but may apply to some im-
provements to land.

47. MARCS Half-Year Convention

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Generally, for first-year depreciation of equip-
ment and most land improvements, MACRS
requires the half-year convention. This con-
vention requires that all property (equipment
and land improvements) be depreciated as if
it were placed in service in the middle of the
year, regardless of purchase date.

48. MARCS Mid-month conven- MACRS imposes the mid-month convention.

tion. This convention requires that buildings be
depreciated as if purchased in the middle
of the month, regardless of when actually
purchased.

49. MACRS - Do not include residual/salvage value

- years to depreciated define by IRS no by
company
- 5 years depreciation computer, office equip-
ment, and auto
- 7 years depreciation equipment, furniture

50. original cost include cost of purchase, transportation, in-

stallation, sales tax, commission, insurance
from delivery

51. depreciation base - SL, Unit Cost of asset less residual value
and Sum method

52. Unit prod method quantity of unit, miles or hours calculate per
year. Did not matter what time equipment
was purchase or place in service

53. Macrs - machine/equipment Reduction of 50% apply only to NEW ma-

BONUS chine/equipment on first year

54. macrs - non/residential calculate % present in the month of purchase

from mid month table. if company has calen-
dar in different than Dec, for example, march
and purchase blinding in Set. Use percent-
age of 6 months ( Mar to Set = 6 months )
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55. Macrs X GAAP Depreciation using GAAP will be send to

books
Depreciation using MACRS will be use to
calculate federal income tax
CPA can use MACRS depreciation value on
books if not material different.

56. Unit produced method depreciation rate CHANGE every year. Use
quantity of unit produce during year. Calcu-
late base deprecation ( original cost - resid-
ual) / Total quantity produce year x quantity
of unit produce. Debit inventory - working in
process (except vehicle)

57. Sum of year method depreciation rate CHANGE every year.

58. Journal entry to manufacture Debit INVENTORY - working in process and

credit Accumulate depreciation

59. depreciation RATE - Double 1 / estimate life X 200%. No change during

method year

60. Double declining method depreciation rate did NOT change. Use same
rate from all year of depreciation. However,
depreciation base will change ever year. Cal-
culate (book value from begin of book ) x
depreciation rate.

61. Straight line method depreciation rate did NOT change. Use same
rate from all year of depreciation. Calculate
base deprecation ( original cost - residual) /
years of estimate life or 1.00 / years (estimat-
ed life)

62. Book value is the acquisition total cost. first year is origi-
nal cost (no include residual) , second year is
original cost less accumulated depreciation
from year 1 and year 2

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63. Mid Quarter apply to purchase that excess more then
40% in last 3 months

64. Mid Month use for buildings. Calculate regardless when

actually purchase

65. Macrs - vehicle use depreciation that would present less val-
ue when compare to table

66. Sec 179 - reduce machine/equipment in $250.000

first year.
- reduce vehicle over 6000 pounds in
$25.000 first year
- not apply to building
- not use reduction if generate loss from com-
pany.
- apply to new or use machine/auto

67. Sum of year method To compute deprecation multiply the depre-

ciable base by the depreciation rate. Under
SYD, the depreciation rate is a fraction that
is used as follows:
Numerator / Denominator = Years remaining
in asset's life / SYD = depreciation rate
Numerator: Years remaining in the assets life
as of the beginning of the year. if you are
depreciating
calculate 12 consecutive months even if that
results in same rate being use in two different
calendar year

68. Journal entry to Non-manu- Debit depreciation EXPENSE and credit Ac-
facture cumulate depreciation

69. vehicle Employer can use 100% to vehicle use to

business and perusal by employee if declare
in W2 personal use.
Employer can only take the % use in busi-
ness

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70. depreciation RATE - Straight 100% / estimate life. No change during year
line method

71. depreciation RATE - Unit of Base (cost - residual) / estimate TOTAL

production unit.miles, hours machine/vehicle will pro-
duce/use. No change during year.

72. For assets acquired during for 12 consecutive months, even if that re-
the year, the sum-of-years' sults in the same rate being used on two
digits method requires that different calendar years.
the same depreciation rate be
used.....

73. Group Purchases The acquisition cost is $6,000.

The price of each asset in a Company estimates, or obtains from a formal
group purchase is computed appraisal the FMV if each asset, as follows:
as ? Assets FMV
computer $4,000
Printer $1,000
copier $3,000
Total FMV $8,000

To compute the acquisition cost of the as-

sets:
4,000 / 8000 = 0.5% X 6,000 = 3,000 acqui-
sition cost

74. How to get the Numerator for If you are depreciating an asset with a 10
the SYD Method - year estimated life, The numerator to use
at the end of Year 1 is 10 because that is
the number of years remaining in the assets
life as of the beginning of the first year .
The numerator to use at the end of Year 2
is 9, because that is the number of years
remaining in the asset's life.

75. How to get the denominator If there are 5 years in the assets lifes the sum
for the SYD Method of the digits is 15 (5+4+3+2+1). To save time
in adding up digits shortcut is
5 x (5+1) / 2 = 15
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76. Under any GAAP deprecia- $245,000

tion method, the maximum
depreciation permitted over
the asset's life is ....

77.

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