The summary of ‘Cost Recovery Mid-Month Convention. CPA/EA Exam’

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The video provides a comprehensive overview of depreciation methods for real property, distinguishing between residential and non-residential rental properties and emphasizing the mid-month convention. Forehead Lectures, the company behind the video, offers supplemental CPA exam and accounting course resources. Key concepts discussed include the straight-line depreciation method used for both residential (27.5-year life) and non-residential (39-year life) properties, with specific examples illustrating the prorated calculations for partial years. The video explains that the mid-month convention assumes property is acquired or disposed of in the middle of the month, affecting the annual depreciation calculations. Key figures, such as John and his property transactions, serve as practical examples to clarify these calculations. The speaker encourages further study using various educational resources and stresses the importance of understanding different depreciation conventions for accounting professionals.

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In this part of the video, the speaker makes an announcement about their company, Forehead Lectures, which provides supplemental educational resources for CPA exam preparation and accounting courses. The resources include lectures, multiple-choice questions, true/false questions, and exercises.

The segment then shifts to discussing the mid-month convention for depreciation of real property, also referred to as Realty property. Real property includes buildings and warehouses, as opposed to personal property like cars. The video explains the different classes of real property, distinguishing between residential rental property (where people live) and non-residential property (commercial buildings). Residential rental property has a class life of 27.5 years, while non-residential property has a class life of 39 years. The depreciation method used for real property is the straight-line method, as opposed to the double declining balance method used for other types of property. The mid-month convention requires that depreciation calculations assume property is acquired, placed in service, or disposed of in the middle of the month.

00:03:00

In this segment, the video discusses the differences between residential and non-residential rental properties, particularly in the context of depreciation. It clarifies that hotels, motels, and similar establishments are not considered residential rental properties. The segment explains the mid-month convention, where any property put into use at any point in a month is considered to have been put into use on the 15th of that month. It details the depreciation schedules: residential rental properties use a 27.5-year straight-line method, with a partial depreciation in the first year, and non-residential (commercial) properties use a 39-year straight-line method, also with first-year prorated depreciation. The segment includes examples illustrating the prorated calculations and highlights that the total depreciation amounts to specific figures, demonstrating the minor rounding differences.

00:06:00

In this part of the video, the speaker discusses how depreciation for real estate is prorated over the years. For a residential real estate building purchased by John on April 1, 2005, for one million dollars, the cost recovery deduction using the straight-line method is calculated based on the 27.5 years mid-month convention. From year two to year 27, the deduction rate is 0.03636, resulting in an annual deduction of $36,360. If the property is sold in October, the deduction is prorated to account for the partial year, leading to a calculated depreciation of $28,782 for nine and a half months.

An example of a commercial property purchased by John on November 2, 2022, for one million dollars is also presented. For commercial properties classified as non-residential, a 39-year straight-line mid-month convention is used. The rate is 0.3210 for the 11th month (November), making the prorated amount for the sale on May 5, 2025 different from a full year’s recovery.

00:09:00

In this part of the video, the speaker discusses the calculation of the deduction rate for assets sold in mid-May, emphasizing the application of the mid-month convention. They explain the process step-by-step, stating that for an asset held for 4.5 months out of the year, the deduction is calculated by taking the full-year rate, multiplying it by the portion of the year the asset was held, and then applying this to the asset’s value. The result is a deduction of 9615. The speaker also advises viewers to consult additional resources like multiple-choice questions, true/false notes, and further lectures for a better understanding of cost recovery methods. They touch upon different conventions like half-year, mid-quarter, and mid-month, and encourage CPA candidates, enrolled agents, and accounting students to keep studying and investing in their education.

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