Page 77 - Account for Ag - 2019

CH 12] Accounting for Fixed Assets & Depreciation 12-5

At the end of the fifth year the book value of the asset is $777.60. If the asset remains in use beyond the estimated
useful life, the asset may continue to be depreciated at the rate calculated by the declining balance method until the
salvage value is reached.

Sum of the Years Digits method. Sum of the Year's Digits Method of calculating depreciation is another
accelerated depreciation method authorized by the 1954 Code. It may be used for property meeting the same
qualification required for the declining balance method. In this method a different fraction is applied each year to
the Total Allowable Depreciation (Cost - Salvage Value). The numerator of the changing fraction is the number of
remaining years of the life and the denominator is the sum of the numbers representing the years of life. To
illustrate, let's recall the wagon as previously stated. Assuming a an estimated life of 5 years, the denominator of
the fraction would be (1+2+3+4+5 =) 15 years; for the first year the numerator would be 5, for the second year 4,
and so on. For our $10,000 wagon with $500 salvage value, TAD is calculated at ($10,000 - $500 =) $9,500, and
an estimated life of 5 years, the schedule of depreciation would be as follows:

Depreciation Accumulated
Expense Allowance
Year Fraction x TAD = for Year For Depreciation
1 5/15 x $9,500 = $ 3,166.67 $3,166.67
2 4/15 x $9,500 = $ 2,533.33 $5,700.00
3 3/15 x $9,500 = $ 1,900.00 $7,600.00 12
4 2/15 x $9,500 = $ 1,266.67 $8,866.67
5 1/15 x $9,500 = $ 633.33 $9,500.00

Adding the digits of years for assets that have a life of 30 or 40 years can be cumbersome compared to adding
short lived assets of 5 to 7 years. The formula ((n(n+1)/2) also arrives at the solution of summing the years digits.
The variable “n” is the life of the asset. To illustrate: in the previous example, summing the digits 1, 2, 3, 4, and 5
equaled the value of 15. When using the formula ((n(n+1)/2) and substituting 5 as the value of n, one calculates ((5
(5+1)/2) as equal to 15. Similarly for an asset of 40 years the calculation is ((40(40+1)/2) and equals 820. This
simple calculation should be used in Sum of Years Digits depreciation problems.

Accelerated Cost Recovery System (ACRS)
The Economic Recovery Tax Act of 1981 significantly changed the method of computing depreciation with
the enactment of the Accelerated Cost Recovery System (ACRS). The 1981 ACRS rules apply to most tangible
personal and real property placed in service after 1980 and before 1987. Property that qualifies for ACRS is called
recovery property.
You should use the pre-1981 depreciation rules for any assets placed in service before 1981, and for assets
placed in to service after 1980 that do not qualify for ACRS treatment or that you have elected to exclude from
ACRS. Such property is called non-recovery property.
Depreciation of Recovery Property. Recovery property is any depreciable property used for business or the
production of income acquired after 1980, excluding non-recovery property. Under the Accelerated Cost Recovery
System, the recovery of the cost of depreciable property will generally be determined by using a statutory
accelerated method. The method used will be 150 percent of declining balance, switching to straight line to
maximize the deduction.
If preferable, you may elect to use a straight-line method over the recovery period or specified longer periods.
If non-business use is 50 percent or more, you must use a straight-line method over a specified longer period.
ACRS percentage tables for both personal and real property are shown in Illustration 12-1.
Under ACRS, the cost of recovery property is written off over a three-year, five-year, ten-year, or fifteen-year
(eighteen-year or nineteen-year) period depending on the type of property.
Eligible three-year recovery property includes autos, light-duty trucks, machinery and equipment used for
research and experimentation, and special tools with an asset depreciation range midpoint life of four years or less.
It also includes racehorses over two years old and any horse over twelve years old.
Eligible five-year recovery property includes such items as heavy-duty trucks, lathes, most equipment and
machinery, ships, aircraft, and most office machines and furniture. Single-purpose agricultural and horticultural
structures, such as chicken coops, greenhouses, and storage facilities for petroleum products, are included in the
five-year category.
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