Depreciation charges

In the first case, the annual taxable income is reduced by an annual depreciation charge or allowance which has the effect of reducing the annual amount or tax payable. The annual depreciation charge is merely a book transac tion and does not involve any expenditure of cash. The method of determining the annual depreciation charge must be agreed to by the appropriate tax authority. 

Year, n Net capital expendihire, Atc Revenue from sales, Total expenses. Ate Cash income, Aci Depreciation charge. Ad Taxable income, Aci - Ad) Amount of tax at t = 0.5, A,t Net cash flow, Acf Discount factor at i = 10%, f. Discounted net cash flow, Adcf Net present value (NPV)... 

Accountants regard assets as resources that have not yet been used up. Assets are normally shown on the balance sheet at cost minus accumulated depreciation. In this sense, the depreciation charge for an accounting period is the means of converting a part of an asset into a current expenditure that is then listed as an expense in the income statement. 

Let us consider plant eqmpment costing I million and purchased on Jan. I, 1988. T le 9-18 ows the provision for the depreciation account for 1988, 1989, and 1990 for straight-line depreciation, assuming a service hfe of 10 years and zero scrap value. The credit entries of 100,000 for the depreciation in each year are balanced by the depreciation charge of 100,000 debited to the income statement (or trading and profit-and-loss account) in each year. Table 9-19 shows the corre-... 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

Although Abd does not affec t working capital in any way, the annual depreciation charge Ad does affec t the annu amount of tax A,r given by... 

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 gross annual profit Acp in Table 9-36 is dependent on the balance-sheet annual depreciation charge Abd, whicm is not necessarily the same as the depreciation allowance used for tax purposes. Since Abd is arbitrarily chosen, it can be used to make the gross annual profit Agp high or low according to the company policy. 

Compare the following two plants using the Annual Proceeds per Dollar of Outlay. Plant 1 has a life of 2 years and plant 2 will last 5 years. The capital investment for each plant is 20,000,000. The proceeds (depreciation charges have not been included as an expense) are as follows ... 

When determining the net present value, taxes should be included. To do this an understanding of depreciation is required. This is discussed in Chapter 11. For all further examples in this chapter it will be assumed that taxes and depreciation charges are included in the expenditures. 

Depreciation charges, which can be used in the same way as profits, should be treated in a similar way (see Chap. 11). 

In 1973 the companies specializing in the production of industrial chemicals and synthetic materials needed to raise about 6,000,000,000. It was expected that about 80% of that would be obtained from net income and depreciation charges. About 10% would be borrowed and the remaining 10%would come from the other categories.19... 

The current methods for determining aimual depreciation charges are the straight-line depreciation and the Modified Accelerated Cost Recovery System (MACRS). In the straight-line method, the cost of an asset is distributed over its expected useful life such that the annual charge is... 

The payback period(or payout time) is the number of years from plant start-up required to recover all expenses involved in a project, if all the pre-tax profits were used for this purpose. Depreciation charges are not included in the operating costs. Expenses not incurred directly in the design and construction of the plant are excluded, the analysis is intended to demonstrate the best means of allocating the present and future resources of a company. A payback period of less than five years is usually required for a project to proceed. However, the payback period does not consider the timing of the payments or the profits earned by the plant after the payback period. 

Total capital Investment = T = W + A, + V (without land ond depreciation charge must write off A. + V over life of... 

C = original capital investment Cn = new capital investment d = depreciation charge dn = number of drawings and specifications D = total direct cost of plant... 

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. 

Although the sinking-fund viewpoint assumes the existence of a fund into which regular deposits are made, an actual fund is seldom maintained. Instead, the money accumulated from the depreciation charges is put to work in other interests, and the existence of the hypothetical fund merely serves as a basis for this method of depreciation accounting. 

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 ... 

An asset with an original cost of 10,000 and no salvage value has a depreciation charge of 2381 during its second year of service when depreciated by the sum-of-digits method. What is its expected useful life ... 

For replacement economic comparison, the OVT computer is worth nothing at the present time therefore, annual total expenses with the OVT computer = 250,000 (i.e., no depreciation charge). 

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