Chapter 8.4 – Adjusting for Depreciation

Depreciation –

This decrease in value needs to be recorded as an expense for the period.

There are 2 ways to calculate depreciation 1. 2.

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:

011700 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 Assets7800011700 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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