Assignment_6_-_Lecture_notes

Estimate a separate accounting named accumulated

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Estimate. A separate accounting named accumulated depreciation is used to record the estimated wearing out. The asset account carries actual cost, the accumulated depreciation carries estimated depreciation Book value = cost – accumulated depreciation Recorded as an adjusting entry at the end of each period. Accounts: Depreciation Expense - expense Accumulated depreciation – contra asset Three methods: A. Straight-line B. Double declining balance C. MACRS A. Straight-line Named straight-line because depreciation is the same amount every year. Formula: (cost – residual value) / estimated life = depreciation for the year Example 1 (full year): Cost of Fixed Asset: $5,000 Residual value: $500 Estimated life: 3 years Solution: (5,000 – 500) / 3 = $1,500 depreciation per year Table: Year Cost Depreciation Expense Accumulated Depreciation Book Value 1 5,000 1,500 1,500 3,500 2 5,000 1,500 3,000 2,000 3 5,000 1,500 4,500 500** **Final book value is the same as the residual value.
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Example 2 (partial year): Cost of Fixed Asset: $5,000 Residual value: $500 Estimated life: 3 years Placed in service: October 1 st Solution : (5,000 – 500) / 3 = $1,500 depreciation per year First year: $1,500 * 3months/12months = 375 Table Year Cost Depreciation Expense Accumulated Depreciation Book Value 1 5,000 375 375 4,625 2 5,000 1,500 1,875 3,125 3 5,000 1,500 3,375 1,625 4 5,000 1,125 4,500 500** B. Double-Declining Balance
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