Key Accounting Principles Volume 1, 4th Edition - Textbook - page 119

Chapter 5
The Accounting Cycle: Adjustments
119
depreciation =
$10,000 – $1,000
5 years
= $1,800 per year
The cost we are allocating over 5 years is $9,000, which is the original purchase price minus the
estimated residual value. Each year we will record $1,800 as a depreciation expense and each year
we will add $1,800 to accumulated depreciation.The journal entry is shown in Figure 5.19.
ACCUMULATED DEPRECIATION
DEPRECIATION EXPENSE
+
-
+
-
1,800
1,800
journal Page 1
date
2016
account title and explanation Pr debit credit
Dec 31 Depreciation Expense
1,800
Accumulated Depreciation
1,800
To adjust for depreciation
______________
FIGURE 5.19
Since each year the income statement resets and starts from scratch, depreciation expense of $1,800
will be recorded each year.The accumulated depreciation account, on the other hand, will increase
by $1,800 each year. As the accumulated depreciation account increases, the net book value of the
machine will decrease.Net book value is the original cost of the asset less accumulated depreciation.
The above transaction will be recorded at the end of each year. The amount of accumulated
depreciation and the net book value of the machine over the five-year useful life are shown in the
table in Figure 5.20.
year
original cost
of machine
depreciation
expense
accumulated
depreciation
net Book
Value
2016
10,000
1,800
1,800
8,200
2017
10,000
1,800
3,600
6,400
2018
10,000
1,800
5,400
4,600
2019
10,000
1,800
7,200
2,800
2020
10,000
1,800
9,000
1,000
total
$10,000
$9,000
$9,000
$1,000
______________
FIGURE 5.20
The net book value at the end of 2020 is equal to $1,000, which is the estimated residual value of
the machine.This means that $9,000 of the cost of the machine was allocated over 5 years.
In addition to the above example, it is possible that depreciation may be recorded for periods of time
that are less than one year. For example, suppose the machine was purchased on September 1, 2016
and the business records adjustments at year end, December 31, 2016. In this case, depreciation
should only be recorded for four months.The calculation of depreciation in this example is shown
below.
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