AAE 0 Problem Set # Due October, 06 Name: ) You had a machine shed built and bought a tractor. The machine shed cost $0,000 and the tractor cost $0,000. For your internal farm accounting purposes, you will depreciate the machine shed over 0 years and the tractor over years. The machine shed will have zero salvage value, but the tractor will have a salvage value of $60,000. For this problem, fill out the following tables that report the value of the asset at the beginning of each year, the amount of depreciation during each year and the value at the end of each year. There tables for the machine shed and for the tractor. For each asset, one table uses Straight Line depreciation, the other uses 0% Declining Balance. Do the full life cycle for each asset (0 years for the shed and years for the tractor). For the 0% Declining Balance, do not let the asset value fall below the salvage value (set depreciation to zero if needed) and if the implied value does not reach the salvage value by the end of the useful life, take the remaining value as depreciation in the last year. Machine Shed, Straight Line Machine Shed, 0% Declining Balance Year Beginning Basis Depreciation Ending Basis Beginning Basis Depreciation Ending Basis 6 7 8 9 0 Tractor, Straight Line Tractor, 0% Declining Balance Year Beginning Basis Depreciation Ending Basis Beginning Basis Depreciation Ending Basis 6 7 8 9 0
) In this problem, you will figure the depreciation you can claim for tax purposes for the machine shed. Use IRS Publication 96: How to Depreciation Property https://www.irs.gov/pub/irs-pdf/p96.pdf. For this problem, you will use MACRS, electing the GDS option and not claiming any Section 79 depreciation (Read Which Depreciation System (GDS or ADS) Applies? beginning on p. 0 and What is the Basis for Depreciation? beginning on p. ). a) Read Which Property Class Applies under GDS starting on p.. What property class (-year, - year, 7-year, etc.) must be used for the machine shed, which is technically not a single purpose agricultural or horticultural structure for tax purposes? Read Recovery Periods Under GDS on p., but especially see Appendix B, beginning on page 00, especially page 0 where common agricultural assets are listed. What recovery period (how many years) must be used for the machine shed? Recovery Period = b) Suppose you built the machine shed and had it ready for use in July of 06. Read Which Convention Applies? on p. 7. The machine shed is not nonresidential real property. Because the machine shed was placed in service before the final three months of the year and is not a large portion of the total depreciable property you will claim for deductions during the th quarter, I interpret this section to mean that you should use the mid-quarter convention, with the asset placed in service during the rd quarter. Using Chart on p. 70, which depreciation table must be used for the machine shed? Depreciation Table = c) Use the appropriate depreciation table to calculate the depreciation you will be able to claim as a deduction each year for the machine shed s useful life as defined for tax purposes. What I want is a table staring in 06 (when the shed was placed in service ) and what percentage of the original cost you can claim as a depreciation cost each year until the machine shed it totally depreciated for tax purposes. I have created an empty table on the next page for 8 years, which is more than needed. You will simply copy in the depreciation percentages from the table you determined in part b and then calculate the depreciation dollars you will claim for the next 8 years (some of the last years will be 0), and then the remaining basis (asset value for tax purposes) at the end of the year. The Depreciation ($) is the depreciation expenses for the machine shed that you could deduct from your taxable income during each year and the Remaining Basis is what you would use for depreciation recapture if you sold or transferred the building. Note: I found it easier to use a spreadsheet program to do the calculations, and then copied the values into the table.
Calendar Asset Year Year 06 07 08 09 00 0 6 0 7 0 8 0 9 0 0 06 07 08 09 00 0 6 0 7 0 8 0 9 0 0 06 07 08 09 00 0 6 0 7 0 8 Tax Depreciation for the Machine Shed ($0,000 initial value). Depreciation (%) (from tax table) Depreciation ($) Remaining Basis
d) For this problem, you want to see if you can take Section 79 depreciation for the tractor. Skim over IRS Pub 96 Electing the Section 79 Deduction beginning on p.. Focus on determining whether the tractor qualifies for this deduction (see Eligible Property p. 6 and following) and how much you can claim (see How Much Can you Deduct (p. 8 and following). Specific questions to answer for this problem: i. Does the tractor qualify for Section 79 depreciation deduction? ii. If it were a tractor bought for $0,000 in 06, could you claim all $0,000 as Section 79 depreciation in the first year? If not, how much could you claim? ) Use the Sample Balance Sheet # posted on the class home page that were handed out in class http://www.aae.wisc.edu/aae0/farmfinance/balancesheetexample.pdf to answer these questions: a) What was this farm s current ratio on //X? What was it on //X? Interpret this farm s current ratio Are they doing okay or is there a problem? b) What was this farm s debt to asset ratio on //X? What is this farm s equity to asset ratio on //X? What is this farm s debt to equity ratio on //X? Interpret this farm s ratios are they doing okay or is there a problem?
c) On //X, how much corn did the farm have? At what price was it valued? How much total value was it? What is the total value of this corn if a price of $.00 per bushel were used? What is the current ratio on //X if you use a price of $.00/bu? d) Concerning the farm s machinery (not vehicles): What was the original cost of all the farm s machinery purchased over the years? How much depreciation has already been claimed for all of this machinery? What was their total book value (remaining tax basis) on //X? What was their total market value on //X? Which value (market or cost) does the balance sheet use? e) How many acres did the farm have on //X? When did they buy the land and how much in total did they pay for all of it? What was the land worth on //X? Which value (market or cost) does the balance sheet use?