'-'. ..........
Straight-Line Depreciation
Consider the costs that are incurred by a local pizza business. Identify each cost as eitherexpensed
ordepreciatedand describe why.
·Cost for pizza dough and toppings
· Costto pay wagesforjanitor
·Cost of a new baking oven
· Cost of new delivery van
· Cost of furnishings in dining room
· Utilitycostsfor sodarefrigerator
..SOLUTION.
Cost Item
Pizza dough and toppings
New delivery van
Wages for janitor
Furnishings in dining room
New baking oven
Utilities for soda refrigerator
Type of Cost
Expensed
Depreciated
Expensed
Depreciated
Depreciated
Expensed
Why
Life < t year; lose value immediately
Meets 3 requirements for depreciation.
Life < 1 year; lose value immediately
Meet 3 requirements for depreciation
Meets 3 requirements for depreciation
Life < 1 year; lose value immediately
_ ~.."~~.r.. - J
Types of Property xii CONTENTS
The rules for depreciation are linked to the classification of business property as either
tangible or intangible. Tangible property is further classified as either real or personal.
Tangible property can be seen, touched, and felt.
Real property includes land, buildings, and all things growing on, built upon,
constructed on, or attached to the land.
Personal property includes equipment, furnishings, vehicles, office machinery,
and anything that is tangible excluding assets defined asrealproperty.
Intangible property is all property that has value to the owned but cannot be directly
seen or touched. Examples include patents, copyrights, trademarks, trade names, and
franchises.
Many different types of property that wear out, decay, or lose value can be depreciated
as business assets. This wide range includes copy machines, helicopters, buildings, interior
furnishings, production equipment, and computer networks. Almost all tangible property
can be depreciated.
One important and notable exception is land, which isneverdepreciated..Land does
not wear out, lose value, or have a determinable useful life and thus does not qualify as a
depreciable property. Consider the aspect of loss in value. Rather than decreasing in value,
most land becomes more valuable as time passes. In addition to the land itself, expenses
for clearing, grading, preparing, planting, and landscaping are not generally depreciated
because they have no fixed useful life. Other tangible property thatcannotbe depreciatet
includes factory inventory, containers considered as inventory, equipment used to bui!.:
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