Depreciation book value

Possible numerators include the gross income net pretax income net after-tax income gross profit, ie, gross income minus book depreciation cash flow or net income. An average return value is selected by defining a typical or mature proof year as the basis of calculation. The denominator can be the original total investment, depreciated book-value investment, lifetime averaged investment, or fixed capital investment. 

The annual return may be the gross income, net pre-tax income, net after-tax income, cash flow, or profit. These may be calculated for one particular year or as an average over the project life. Investment may be the original total investment, depreciated book-value investment, lifetime average investment, fixed capital investment, or equity investment. The investment includes working capital and sometimes capitalized expenses such as interest on capital during construction. 

It should be noted that a capital allowance Is not a cashflow item, but is only calculated to enable the taxable income to be determined. The treatment of capital allowance for this purpose is a petroleum economics approach, which may differ from the accountant s view of depreciation when calculating net book values and profit. 

On the basis of declining-balance (fixed-percentage) depreciation, the book value at the end of the first year is given by... 

In the sinking-fund method of depreciation, the effect of interest is to make the annual decrease of the book value of the equipment or plant less in the early than in the later years with consequent higher tax due in the earlier years when recovery of the capital is most important. 

Figure 9-5 shows the fall in book value with time for a piece of equipment having a fixed-capital cost of 120,000, a useful hfe of 10 years, and a scrap value of 20,000. This fall in value is calculated by using (I) straight-line depreciation, (2) double-declining depreciation, and (3) sum-of-years-digits depreciation. 

FIG. 9-5 Book value against time for various depreciation methods. 

Book values of fixed assets are determined by the balance-sheet annual depreciation charges Abd, which do not affect working capital. Although the accounting gain or loss on the sale of a fixed asset is based on its book value, working capital is not affec ted by depreciation assessments. 

The rate of return is often calculated for the anticipated best year of the project the year in which the net cash flow is greatest. It can also be based on the book value of the investment, the investment after allowing for depreciation. Simple rate of return calculations take no account of the time value of money. 

Investors, however, like companies that have large tangible assets, because they think they have a better chance of getting their money back should the company become bankrupt. The tangible assets are the undepreciated assets of the company. So if a company is interested in selling bonds, it looks better if it has depreciated its assets slowly. As a result, some companies keep dual books-one for the public and the other for the Internal Revenue Service. There is nothing illegal about this. The capitalized cost minus the amount that has been depreciated is called the book value of the asset. This may be above, below, or the same as its resale value. 

If, however, in the fourth year the straight-line depreciation method had been adopted, the full plant could be depreciated by the end of 6 years. At the beginning of the fourth year the book value was 1,778,000 and there were 3 years of expected life remaining. By the straight-line method this would mean the plant should be depreciated 593,000 in each of the last 3 years. 

In the remaining-life plan the depreciation for any year is the book value reduced by an acceptable salvage value times a fraction. The numerator of the fraction, as before, is the number of years of useful life remaining. The denominator is the sum of the digits from one to the number of years of useful life remaining. For this plan the denominator is not a constant. 

The determination of the present value for the depreciation plans is one of the best ways of comparing depreciation plans. In calculating the present value it will be assumed that depreciation expenses remain in the company and effectively reduce income taxes. If the income tax rate on earnings is 48%, then the amount of income tax saved when depreciation expenses are increased by 100 is 48. Therefore, the net savings of including depreciation as an expense is 48% of all depreciation. If the net salvage value is less than the book value after depreciation, the difference is an income and is subject to taxation. Since the amount will be the same for each of the depreciation schemes, it will not be considered in comparing the different methods. 

Book value is the original investment minus the accumulated depreciation. 

Book value Current investment value on the company books as the original installed cost less depreciation accruals. 

When the double declining method is considered, = 2/N, the annual depreciation is twice that of straight-line depreciation and the amount depreciated decreases with increase in the value of n. In the case of double declining balance depreciation method, the book value P—HDn in the nth year is given by4 ... 

The value of property items, such as land, buildings, and equipment, is usually reported as the value of the asset at the time of purchase. Depreciation reserves are also indicated, and the difference between the original property cost and the depreciation reserve represents the book value of the property. Thus, in depreciation accounting, separate records showing accumulation in the depreciation reserve must be maintained. In the customary account, reserve for depreciation is not actually a separate fund but is merely a bookkeeping method for recording the decline in property value. 

The original cost for a distillation tower is 24,000 and the useful life of the tower is estimated to be 8 years. The sinking-fund method for determining the rate of depreciation is used (see Example 5), and the effective annual interest rate for the depreciation fund is 6 percent. If the scrap value of the distillation tower is 4000, determine the asset value (i.e., total book value of equipment) at the end of 5 years. 

The difference between the original cost of a property, and all the depreciation charges made to date is defined as the book value (sometimes called unamor-tized cost). It represents the worth of the property as shown on the owner s accounting records. 

It is difficult to predict future market values or replacement values with a high degree of accuracy because of fluctuations in market demand and price conditions. On the other hand, a future book value can be predicted with absolute accuracy as long as a constant method for determining depreciation costs is used. It is quite possible for the market value, replacement value, and book value of a property to be widely different from one another because of unrealistic depreciation allowances or changes in economic and technological factors. 

Since the value of R represents the annual depreciation cost, the yearly cost for depreciation is constant when the sinking-fund method is used. As shown in Fig. 9-3, this method results in book values which are always greater... 

The original cost of a property is 30,000, and it is depreciated by a 6 percent sinking-fund method. What is the annual depreciation charge if the book value of the property after 10 years is the same as if it had been depreciated at 2500/year by the straight-line method ... 

A materials-testing machine was purchased for 20,000 and was to be used for 5 years with an expected residual salvage value of 5000. Graph the annual depreciation charges and year-end book values obtained by using ... 

The difference between the book value and the net realizable value at any time is commonly designated as the unamortized value. In the example, the unamortized value was 15,000 - 6000 = 9000. This means that a 9000 loss was incurred because of incorrect estimation of depreciation allowances.+... 

USE OF BOOK VALUE FOR OLD EQUIPMENT IN REPLACEMENT STUDIES. This error is caused by refusal to admit that the depreciation accounting methods used in the past were wrong. Persons who make this error attempt to justify their actions by claiming that continued operation of the present equipment would eventually permit complete depreciation. This viewpoint is completely unrealistic because it gives no consideration to the competitive situation existing in modem business. The concern which can operate with good profit and still offer a given product or service at the lowest price can remain in business and force competitors either to reduce their profits or to cease operation. 

The book value of an asset is the original cost paid minus the accumulated depreciation charged. The book value has no connection to the resale value or current market value of the asset ... 

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