Play Meter

...
..
• •
•
••• ¢~
~~
..
~ .. •• c;
.. ..
.
~
...
'.
,
•
",?
~""
o~
••
... ~"
"I~
~,
~
What is depreciation
and what method
is best for you
By Charles Ross
Two avid pinball players walk into
their neighborhood amusement cen -
ter to play their favorite games . Frank
is disappointed to find his machine
gone .
"Where is that old Beepo pinball
mach ine? " he inquires.
"It broke down last weekend and it
was just a bit too worn out to try to
repair so we traded it in on a new
game ."
Accepting the answer Frank joins
Joe who is reaching in his pocket for
a quarter to play the Macho
machine . "Don 't play that one!"
shouts Frank .
"Why not?" retorts Joe .
"That Macho machine is so old
and outdated it's like a row boat
compared to a jet ski. Let's go play
that new electronic pinball Angle·
wings, in the corner .. . " The two
players wander off to check out the
latest while not even realizing they
were discussing depreciation .
not only includes the purchase price
but it also includes all necessary costs
in getting the piece of equipment
ready for use . These other costs
typically include such items as freight
and sales tax .
Table A is the determination of
the cost of a pinball machine which is
shipped by truck to the operator from
the distributor . It should be pointed
out that all freight and taxes are to be
added to the cost of the machine and
not expensed out to freight or tax
expense . They are both part of the
cost normal and necessary to get the
machine in place and ready for use .
machine's life is known as the
"depreciable cost" or "depreciable
basis ." The depreciable cost of a
machine is equal to the cost of the
machine minus the salvage value it is
expected to have at the end of its
useful life .
The depreciable cost is the total
cost that will be recovered through
depreciation expense each year over
the machine 's life . In other words ,
cost minus salvage value equals
depreciable cost to be recovered over
the machine's useful life . Table B is
the depreciable cost of one of our
pinball machines which is expected
to be sold at the end of its useful life
to an individual for use in his home
game room .
What is depreciation?
Depreciation is an estimate of lost
or expired usefulness . Busilless
assets such as equipment have a
certain quantity of usefulness built in;
and , as they are employed , this
quantity of usefulness is consumed .
Several factors affect the amount
of depreciation or usefulness con -
sumed-chiefly wear and tear
through ordinary use , accidental
damage , quality of repairs , timing of
the regular maintenance and obso-
lescence due to technological ad-
vancement.
So . if all these factors affect
depreciation , how is it computed?
Before explaining the methods of
determining depreciation it is neces-
sary to have an adequate under-
standing of the equipment's cost.
Salvage value
To understand the depreciable
cost or depreciable basis for a
mach ine, an understanding of sal-
vage value is also necessary . Salvage
value is that portion of the cost that is
recoverable at the end of the
equipment's useful life . To the
equipment operator the salvage
value may be one of two things : (1)
The value which he will get for the
machine at the end of its useful life as
a trade -i n on new equipment , or (2)
The value he will receive from selling
the old machine to a home user or
another operator .
The equipment operator should
use as salvage value that value which
most nearly approaches what he
thinks the machine will be worth at
the end of its useful life to him , which
of course depends on his method of
disposal. It should be understood
that useful life is the life of the
equipment to the operator , not
necessarily the real life of the
machine which may be thirty years of
more . If the operator plans to employ
the machine for five years that is its
useful life to him .
Allocating depreciation
Although the idea is appealing ,
accountants do not specifically base
depreciation allocations on the mar-
ket value changes or the measured
wear of the machines . This is
primarily because a reliable and
practIcal source at market value data
rarely exists . However , there are
certain methods of calculating de -
preciation so book values closely
approximate market values . The
book value of a machine is its cost
minus accumulated depreciation ;
and , of course , market value is what
the machin e could be sold for to
another user at a given point in time .
Too many times operators allocate
depreciation based on the ease of
calculation . While an easy method is
deSirable, one should not overlook
the methods wh ich closely approxi -
mate actual depreciation and the
methods which minimize income
taxes .
Cost of a piece of equipment
The cost of a piece of equipment
Depreciable cost
The cost to be allocated over the
Straigh t-Line Method
The straight-line method of depre -
16
PLAY METER . January. 1979