Impact Of Depreciation On The Construction Industry Essay

4. The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly.  Given the business conditions Harnischfeger was facing in its primary industries in 1984, are these economic assumptions justified?

The value of fixed assets typically decreases over time. The amount of the decrease each year is accounted for and is called depreciation. Depreciation for the year is expensed on the income statement and added to the accumulated depreciation account on the balance sheet. So the value of the fixed assets on the balance sheet is reduced by the accumulated depreciation.

1. The first step to evaluating the cash flows is to conduct the depreciation tax flow analysis. Depreciation is not a cash flow, but the depreciation expense lows the taxes payable for the company. As a result, the tax effect of deprecation needs to be calculated as a cash flow. There are two depreciable items on the company's balance sheet the building and the equipment. The equipment is known to have a seven year depreciable life, which will be assumed to be straight line. The building is also assumed to be subject to straight line depreciation, this time of forty years. The tax saving reflects the depreciation expense multiplied by the tax rate, which in this case is assumed to be 28%. The following table illustrates the tax effect in future dollars of the depreciation expense:

c. Depreciation is computed using the straight-line method over the asset’s estimated useful life, which is determined by asset category as follows: Buildings and improvements (5 – 40 years); Store fixtures and equipment (3 – 15years), Leasehold improvements (Shorter of initial lease term or asset life); Capitalized software (3 – 7 years).

| In Year 1, depreciation is $5,000 plus 15% of the asset’s outlayFrom Year 2, depreciation is either * 30% of the asset’s book value; or * if the asset’s book value is less than $6,500, depreciation is the asset’s book value (i.e. asset is depreciated to zero once book value < $6,500)

Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age. Depreciation is treated as an expense and is a line item on your income statement but must be applied only to the building and not the land (since land does not wear out over time). You will be able to depreciate the building over a period of 39 years using the Modified Accelerated Cost Recovery System (MACRS). IRS Publication 946 contains the rules and guidelines governing depreciation of non-residential or commercial property.

The equipment can be depreciated by one of two methods: Section 179 allows for a full write off in the year of acquisition (subject to certain limits). MACRS depreciation allows a systematic write off of equipment based on the type of asset. More business assets are either 5 year or 7 year property (CompleteTax, 2012).

Property and Equipment—Depreciation and amortization are provided on a straight-line basis over the estimated useful fives of the assets. The following table shows estimated useful lives of property and equipment.

-The estimated depreciation lives on certain U.S. plants, machinery and equipment changed. The economic life of these assets was increased, so the depreciation expense was lowered.

Every company has their own way to depreciate fixed assets based on their requirements and situations. The main reason for such a difference in strategies is showing the amount of profit in a particular period. In case of Delta they have increased the life of an asset showing low depreciation which leads to low operating expense resulting in higher profits. However for Singapore airline the operating profit is good and there is not much need to show lower depreciation, moreover it adds on to their value by showing a higher salvage value for the equipments they carry.

3. Depreciation: The moment a product is sold it is considered as used product and price of the product is less. There are some exceptions to this rule as land; gold etc. usually appreciates over time. For other products customers are actually buying products that will depreciate over time.

Google accounts for property and equipment at cost less accumulated depreciation and amortization. They compute depreciation using the straight-line method over the estimated useful lives of the assets; usually two to five years and they depreciate buildings over periods up to 25 years. They amortize leasehold improvements over the shorter of the remaining lease term or the estimated useful lives of the assets. Construction in progress is related to the construction or development of property, including land and equipment that have not yet been placed in service for their intended use. Depreciation for

The construction industry in Australia has over the recent three years provided increased employment thereby improving the economic financial performance. This has been fueled primarily by middle market construction firms. However, forecast shows that the total non-residential construction would fall between 2014 and 2016 due to falling levels of investment on project activities. The economic deficits incurred in the construction industry would be offset by investments in the telecommunication and commercial construction, especially in apartment building.

Now the basis for all future transactions relating to this building would also be at its cost, i.e. $12 million. For example: The depreciation would be charged on $12 million and not on $15 million. Similarly when the asset is sold in future, the profit or loss on sale would be based on the cost price actually paid for it. Since the original or

The construction industry much like other industries is dependant with the distribution of “scarce resources” (Drake,1994). Many of its resources known as the factors or production i.e. labour, capital, land etc. are limited (Gregory-Mankiw, 2008), however, wants and desires within the industry are infinite (Myers, 2013). Kishtainy notes that this creates two problems; at any given time, there will be a fixed number of resource, against numerous wants. Sloman 2003 adds that in an effort to rectify this, he argues that we must make choices, in terms of choices within the construction industry Myers suggested that firms need to considered their investments made, how they construct and for whom they construct for.