TABLE OF CONTENTS Most systems and components have a limited useful life. Depreciation can be caused by wear or technical/ commercial obsolescence. The rate at which equipment depreciates each year is an allowable tax deduction. Depreciation is largely dependent on the effective life of the asset. The effective life is considered to be the period of time the system or component is in use (operational) up to the time of disposal. Depreciation is commonly calculated by one of two methods: the Prime Cost or Diminishing Value method.
The Prime Cost method allocates an equal amount of depreciation to each full accounting period over the effective life of the equipment. The Diminishing Value method allocates a decreasing amount of depreciation in each full accounting period over the effective life of the asset. Higher deductions are available in the early part of the asset's life, based on the rationale that an asset delivers better services in the earlier, rather than later years of its life.
Sample Useful Life:
| Equipment Type: | Auto | Computers | Farm Equip. | Office Machines |
|---|---|---|---|---|
| Effective Life | 7 Years | 5 Years | 7 Years | 10 Years |
| Prime Cost | 15% | 27% | 20% | 17% |
| Diminishing Value | 22.5% | 40% | 30% | 25% |
Automobile Depreciation:
| Year | Percent |
|---|---|
| 1 = | 30% |
| 2 = | 20% |
| 3 = | 10% |
| 4 = | 5% |
| 4 + n = | 5% |
Double Declining Balance (DDB) is an accelerated method of depreciation that ignores the salvage value of the asset while calculating...
