Step 2: Create a Depreciation Schedule The next step in your project is to creat

Question

Step 2: Create a Depreciation Schedule The next step in your project is to create a depreciation schedule for the (fictional) property purchased with this loan. When the property was purchased, an appraisal was performed. The property included separate components of land and improvements (the building), and also included some fixtures (appliances, such as a refrigerator). You paid a slightly higher appraisal fee than usual, and instructed the appraiser to provide you with the following breakdown of values: Appraised Values Percentage Land $45,000 14.29% Improvements $260,000 82.54% Fixtures $10,000 3.17% Total $315,000 100.00% Your mortgage loan cost of $300,000 must be allocated between these different asset classes, so you can use the appropriate depreciable life to prepare a depreciation schedule, as shown in the following illustration: Appraised Values Percentage Cost Allocation Land $45,000 14.29% $42,857 Improvement $260,000 82.54% $247,619 Fixtures $10,000 3.17% $9,524 Total $315,000 100.00% $300,000 Now, you’ll need to use the MACRS tables to determine the amount of depreciation expense. Assume that the “improvements” represent 39-year, nonresidential rental property and the “fixtures” represent 7-year property. Create a depreciation schedule using the MACRS tables on pages 308–309 of your textbook. Create annual measures and a source document for annual financial statement preparation. Your textbook didn’t provide a depreciation schedule for the 39-year, nonresidential real property, so we’ve provided one below. The measures in the table represent the percentage by which the improvements to the real property may be depreciated, per year, based on the month placed in service, which in this case was January: Year Jan Feb March April May June July Aug Sept Oct Nov Dec 1 2.461 2.247 2.033 1.819 1.695 1.391 1.177 0.963 0.749 0.535 0.321 0.107 2 thru 39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 The amounts in this table are carried out to the third decimal place, so some rounding errors will prevent the improvements from being fully depreciated through year 39. You should prepare the depreciation schedule only through year 30, to match the loan amortization schedule you prepared in Step 1 of the project. To check your work, you can use the following figure, which shows part of the completed depreciation schedule: Year Land Improvements Fixtures Total 1 $0 $6,094 $1,361 $7,455 2 $0 $6,349 $2,332 $8,681 ————————————-Break in Sequence————————————- 29 $0 $6,349 $0 $6,349 30 $0 $6,349 $0 $6,349 Total $0 $190,213 $9,524 $199,737

Explanation / Answer

Year 39 Year Non Residential Property Rates ar per MARCS- Property Placed in Service in Jan 7 Year Property Rates ar per MARCS 7 Year Property Half Convention Total Depreciation Expense 1 6093.90359 2.461 1360.9796 14.29 7454.88319 2 6348.95116 2.564 2332.4276 24.49 8681.37876 3 6348.95116 2.564 1665.7476 17.49 8014.69876 4 6348.95116 2.564 1189.5476 12.49 7538.49876 5 6348.95116 2.564 850.4932 8.93 7199.44436 6 6348.95116 2.564 849.5408 8.92 7198.49196 7 6348.95116 2.564 850.4932 8.93 7199.44436 8 6348.95116 2.564 424.7704 4.46 6773.72156 9 6348.95116 2.564 6348.95116 10 6348.95116 2.564 6348.95116 11 6348.95116 2.564 6348.95116 12 6348.95116 2.564 6348.95116 13 6348.95116 2.564 6348.95116 14 6348.95116 2.564 6348.95116 15 6348.95116 2.564 6348.95116 16 6348.95116 2.564 6348.95116 17 6348.95116 2.564 6348.95116 18 6348.95116 2.564 6348.95116 19 6348.95116 2.564 6348.95116 20 6348.95116 2.564 6348.95116 21 6348.95116 2.564 6348.95116 22 6348.95116 2.564 6348.95116 23 6348.95116 2.564 6348.95116 24 6348.95116 2.564 6348.95116 25 6348.95116 2.564 6348.95116 26 6348.95116 2.564 6348.95116 27 6348.95116 2.564 6348.95116 28 6348.95116 2.564 6348.95116 29 6348.95116 2.564 6348.95116 30 6348.95116 2.564 6348.95116 31 6348.95116 2.564 6348.95116 32 6348.95116 2.564 6348.95116 33 6348.95116 2.564 6348.95116 34 6348.95116 2.564 6348.95116 35 6348.95116 2.564 6348.95116 36 6348.95116 2.564 6348.95116 37 6348.95116 2.564 6348.95116 38 6348.95116 2.564 6348.95116 39 6348.95116 2.564 6348.95116

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