Objective: The purpose of this exercise is to assess your ability to glean key understanding of a

new, abstract topic and apply it to identify a solution for a simplified software
implementation.

We don’t expect you to have prior knowledge of Tax Depreciation. You won’t have
enough time to become thoroughly knowledgeable during this exercise. Please do your
best to understand the core concepts. We suggest you spend no more than 45 minutes
on the Analysis portion. Based on what you learn, decide on the basic rules that you will
rely on to guide you through the remaining sections. Spend no more than 45 minutes in
reviewing the software Requirements we have stated and working on a Design for
satisfying those requirements.

Please provide written responses in as clear and well-organized a manner as possible.

Later, we will ask you to do a verbal presentation of your results.

Analysis: Tax Depreciation for Leased Assets under US MACRS rules

Use any online resources you choose to consult to learn what you can about the
conceptual basics of Tax Depreciation. While you may refer to IRS Publication 946
(provided), recognize that this document is meant to provide guidance in implementing
US tax regulations, not to teach about the underlying concepts and purpose. Please
answer the following questions:

1. What is the purpose of calculating tax depreciation?

a. The purpose of calculating tax depreciation is to accurately capture the

expenses of a fixed asset in the reporting periods the expenses were
incurred. The depreciation expense on the income statement will reduce
the amount of taxable income for a reporting period until the asset has
reached the end of the depreciable life.

2. What is a Depreciation method?

a. A depreciation method is the way depreciation expense is recognized.

There are different methods used to calculate an asset’s depreciation
expense, the reduction of a non-current asset’s value. However, the total
cost of depreciation will not change, the implementation of a certain
method will effect the depreciation expenses for a specific reporting period
during the asset’s depreciable life. This may be used to decrease or increase
taxable income for a specific reporting period. The four popular
 depreciation methods are Straight-Line, Declining Balance, Units of
Production, and Sum of Years.

i. Straight Line Depreciation evenly spreads the cost of depreciation

over the expected useful life of an asset.

ii. Declining-balance Depreciation accelerates the cost of depreciation

in the earlier years of its useful life and declines over time.

iii. Units of Production Depreciation determines the cost of

depreciation by the number of units produced by an asset.

iv. Sum of Years Depreciation computes the cost of depreciation based

on current year and the total years of the useful life.

3. “Conventions” as described in IRS Publication 946 determine how much

depreciation can be claimed during the first year an asset is depreciated. Why
might a “convention” be needed?

a. A “convention” is needed to accurately capture the depreciation expense

for the reporting period in which the expense was incurred. The
depreciation during the first year and the last year of an asset’s depreciable
life will differ compared to the years in between.

4. What is Depreciable Life? How might this differ from an asset’s actual life?

a. The depreciable life is the length in time to expense depreciation on the

specific asset based on current tax regulations. The depreciable life begins
when the asset has been placed in use, and it ends when the cost has been
recovered.

b. Since tax regulation estimate each asset class’ useful life, the asset’s actual
life may exceed or fall short of its depreciable life.

i. If the asset’s actual life exceeds the depreciable life, there will be no
depreciation expense recognized since the asset is fully depreciated.
The book value of asset will be equal to the salvage value.

ii. If the asset’s actual life falls short of the depreciable life, the asset is
not fully depreciated and the cost is not recovered. This will be
recorded as a loss of disposal.
Requirements: Before attempting the Design tasks given below, please consider the following
requirements for depreciation functionality in an asset-based lease accounting system:

1. The system must support the configuration of reusable templates for use in the
determination of Asset-specific annual tax depreciation schedules. Among the
parameters stored for each template must be Depreciation Method, Recovery
Period, and Convention (each of these terms is defined in IRS Publication 946).

2. The system must store Asset-specific attributes impacting the calculation of a

depreciation schedule, including Tax Basis Amount, Asset Type, and In-Service
Month.

3. The system must store Asset Type-specific attributes impacting the calculation of a
depreciation schedule, including Recovery Period and Depreciation Template.

4. The system must support the calculation and storage of Asset-specific Depreciation
Schedules, describing Tax Depreciation amounts to be realized for each year of an
Asset’s depreciable life.

Design: Please describe a solution to satisfy the requirements stated above. Your solution
should address any necessary:

user interface(s),

database tables, and

business logic.

You can assume that:

1. The only necessary Depreciation Method is GDS Straight line (SL).

2. The templates described in the first requirement may store annual percentages in a
structure similar to that used in the tables presented in Appendix A of Publication
946.

3. Your solution document will be passed on to a developer to code the application

and you will have limited communication with him/her.

Feel free to use Microsoft Word, Excel, Visio or any other programs you would like. You
may also hand-draw your User Interface.