Page 74 - Account for Ag - 2019

12-2 Accounting for Agriculture CH 12]

COMPUTATION OF DEPRECIATION
Many methods are used to allocate the cost of assets, machinery and equipment, to accounting periods
through depreciation. Each of them is proper for certain circumstances. The most common methods are (1) the
straight-line Method, (2) the production method, and (3) two accelerated methods known as the sum-of-years'-
digits method and the declining-balance method. There are currently three separate sets of rules for figuring
depreciation. Before you can compute depreciation for an asset in any year, you must first determine which set of
rules applies to each asset. Generally, the date the asset was placed in service determines which rules apply.
However, there are some exceptions that the IRS has identified.

The Modified Accelerated Cost Recovery System (MACRS) may be applied to most tangible personal and
real property placed in service after 1986. Assets covered by the MACRS rules are referred to as MACRS
property.

For property placed in service after 1980 but before 1987, you may apply the Accelerated Cost Recovery
System. Assets to which these rules apply are known as ACRS property.

Assets placed in service prior to 1981 come under the depreciation rules of pre-1981. However, these rules
and methods of calculating depreciation apply to assets placed into service after 1980 that do not qualify for
MACRS or ACRS treatment or that the owner has elected to exclude from MACRS or ACRS. These assets
would be referred to as other depreciable property. The methods of calculating depreciation for other depreciable
property include Straight-line method, Units of Production Method, Declining Balance Method, and Sum of the
Years' Digits Method.

PRODUCTIVE LIFE OF A FIXED ASSET
The productive life of any fixed asset is the period of time its owner uses it in the production or sale of other
assets or services. This may not be the same as the asset's potential life. For example, tractors have a potential
twelve to fifteen year life; however, if a particular company finds from production-cost view that it is wise to
trade its old tractors on new ones every three years, in that company tractors have a three-year service life.
Furthermore, the cost of new tractors less the their trade-in value, the cost of their fund of usefulness to the
business, should be charged to depreciation expense over this three-year period.

At the time of purchase the productive life of a fixed asset must be predicted so that its depreciation may be
allocated to the several periods in which it will be used. Predicting or estimating service life is sometimes
difficult because several factors are often involved. Wear and tear and the action of the elements determine the
useful life of some assets. However, two additional factors, inadequacy and obsolescence, often need to be
considered. When a business acquires fixed assets, it should acquire assets of a size and capacity to take care of
its foreseeable needs; however, a business often grows more rapidly than anticipated. In such cases its fixed
assets may become too small for the productive demands of the business long before they wear out. When this
happens, inadequacy is said to have taken place. Inadequacy cannot easily be predicted. Obsolescence, like
inadequacy, is also difficult to foretell. The exact occurrence of new inventions and improvements normally
cannot be predicted; yet new inventions and improvements often cause an asset to become obsolete and make it
wise to discard the obsolete asset long before it wears out.

A company that has previously used a particular type of asset may estimate the service life of a like new
asset from past experience. A company without previous experience with a particular asset must depend upon
the experience of others or upon engineering studies and judgment. The Farm Advisors office and the Bureau of
Internal Revenue publish bulletins that give estimated service lives for all types of new assets. Many
businessmen refer to these bulletins in estimating the life of a new asset.

DEPRECIATION IN THE YEAR OF PURCHASE OR DISPOSITION
In the first and last year of use, depreciation must be prorated and claimed for the number of months of use.
A month is counted (or not counted) if the asset is purchased (or retired) on or before the 15th. Thus, if an asset
is purchased on January 15, a full year of depreciation is allowable; if purchased on December 15, one month of
depreciation is allowable. If an asset is retired from service on January 16, one month of depreciation is
allowable; if retired on December 16, a full year of depreciation is allowable.
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