Chapter 8.4 – Adjusting for Depreciation

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Presentation transcript:

Chapter 8.4 – Adjusting for Depreciation This decrease in value needs to be recorded as an expense for the period. There are 2 ways to calculate depreciation

1. Straight-line Method Straight-line depreciation for one year =

Example of Straight-line Depreciation A company purchased a truck for $78000 on January 1, 20-2. It estimated that the truck would be used for six years and at the end of that time, it can be sold for $7800. Depreciation = = $ Therefore the depreciation for each of the six years the depreciation expense will be $.

Adjusting Entries for Depreciation Now that you have calculated the depreciation amount, it is time to make the adjusting entry to record the amount of depreciation. We will create 2 new accounts: 11700 11700 Adjusting Entry Adjusting Journal Entry

What is Accumulated Depreciation An accumulated depreciation account is know as Remember a contra account is one that is displayed alongside an associated account and has a balance that is opposite to the account it is associated with in this case the Truck Account. Long-term Assets 78000 11700 66300 .

Calculating Depreciation in First Year of Asset Purchase Straight-line Method – . Ex. A combine was purchased on August 1st, 2013 for $75,000 with a useful life of 10 years and a salvage value of $5000. Calculate the depreciation for the year-end December 31, 2013.

First Year Depreciation – SL Calc: (75,000 – 5,000) / 10 = $7,000 depr./year Aug – Dec = 5 months therefore $7,000/12 months = $ depr./month $` depr. for 2013. Adj. Entry for Dec 2013: DR. Depreciation Expense – Equip $2917 CR. Accum. Depr. – Equipment $2917

2. Declining Balance Method Depreciation = Assets are given rates: Example Using the Truck from the previous example – $78,000 X - Entry is the same. Class Description Rate 3 Buildings 5% 8 Furniture & Equipment 20% 10 Automobiles 30%

Declining Balance – 50% Rule for year asset was purchased For declining balance method of depreciation, you not worrying about the actual month the asset was purchased. Ex. A computer was purchased on Mar 1, 20-1 for $22,000. Calculate the depr. that would be recorded on Dec 31, 20-1 & Dec 31, 20-2. See rates on pg. 308.

Declining Balance – 50% Rule Rate for computer equipment is 55%. $22000 X 55% = 50% Rule is applied - X 50% = $ Year Depreciation Balance 2011 $ $22,000 - $ = $ 2012 $ X 55%

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