APPENDIX $11$A Comparison with MACRS $($Tax Depreciation$)$

Depreciation for financial reporting purposes is an attempt to distribute the cost of the asset, less any anticipated residual value, over the estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset. Depreciation for income tax purposes is influenced by the revenue needs of government as well as the desire to influence economic behavior. For example accelerated depreciation schedules currently allowed are intended to provide incentive for companies to expand and modernize their facilities, thus stimulating economic growth.

The federal income tax code allows taxpayers to compute depreciation for their tax returns on assets acquired after $1986$ using the modifi ed accelerated cost recovery system $($MACRS$).\backslash (\{\}^\{23\}\backslash )$ Key differences between the calculation of depreciation for financial reporting and the calculation using MACRS are

$1.$ Estimated useful lives and residual values are not used in MACRS.

$2.$ Firms can't choose among various accelerated methods under MACRS.

$3.$ A half$-$year convention is used in determining the MACRS depreciation amounts.

Under MACRS, each asset generally is placed within a recovery period category. The six categories for personal property are $\backslash (3,5,7,10\backslash ),15,$ and $20$ years. For example, the $5-$year category includes automobiles, light trucks, and computers.

Depending on the category, fixed percentage rates are applied to the original cost of the asset. The rates for the $5-$year asset category are as follows:

These rates are equivalent to applying the double$-$declining$-$balance $($DDB$)$ method with a switch to straight$-$line in the year straight$-$line yields an equal or higher deduction than DDB$.$ In most cases, the half$-$year convention is used regardless of when the asset is placed in service. $\backslash (\{\}^\{24\}\backslash )$ The first$-$year rate of $\backslash (20\backslash \%\backslash )$ for the five$-$year category is one$-$half of the DDB rate for an asset with a five$-$year life $(\backslash (2\backslash$times $20\backslash \%\backslash )).$ The sixth$-$year rate of $\backslash (5\mathrm{.}76\backslash \%\backslash )$ is one$-$half of the straight$-$line rate established in year $4,$ the year straight$-$line depreciation exceeds DDB depreciation. be depreciated fully using MACRS.

The first two questions are financial accounting questions, not tax MACRS.

$1.$ Prepare a table showing $5-$year straight line depreciation, assuming no residual value.

$2.$ Prepare a similar table for double declining balance. It is ok if there is remaining book value. $3.$ Optional: Prepare a table showing how MACRS is calculated for six years. $\backslash$#

$\backslash$begin$\{$tabular$\}\{|$l$|$l$|$l$|$l$|$l$|$l$|\}$

$\backslash$hline Year & Depreciation Component $1$ & Depreciation Component $2$ & Total depreciation & Remaining book value & Comment $\backslash \backslash$

$\backslash$hline $1$ & & & & & $\backslash \backslash$

$\backslash$hline $2$ & & & & & $\backslash \backslash$

$\backslash$hline $3$ & & & & & $\backslash \backslash$

$\backslash$hline $4$ & & & & & $\backslash \backslash$

$\backslash$hline $5$ & & & & & $\backslash \backslash$

$\backslash$hline $6$ & & & & & $\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$