Depreciation Calculate the annual depreciation for the following assets for the
ID: 2418497 • Letter: D
Question
Depreciation
Calculate the annual depreciation for the following assets for the entire lifespan of each asset. Each asset will have a different method to utilize. In addition, complete the applicable journal entries for each asset for tax year 2014
Land: 25 acres valued at $56,000, inherited, currently in Year 2.
Warehouse: Built in 2012—started to use on 1/6/2012, basis $39,000, residual value $10,000, 30-year life uses straight-line depreciation—currently in year three.
Machinery: Straight line cost $22,000, $6,000 residual value, five-year life—purchased 10/1/2012, currently in year three.
2010 Truck: Cost $20,000, no residual value, four years, purchased and started using on 1/1/2014—currently year two.
Explanation / Answer
Depreciation:
In accountancy, depreciation refers to two aspects of the same concept:
A method of reallocating the cost of a tangible asset over its useful life span of it being in motion. Businesses depreciate long-term assets for both tax and accounting purposes. The former affects the balance sheet of a business or entity, and the latter affects the net income that they report. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. This expense is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation, and the periods over which assets are depreciated, may vary between asset types within the same business and may vary for tax purposes. These may be specified by law or accounting standards, which may vary by country. There are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service.
1) Land: Land is not depreciated because land is assumed to have an unlimited useful life.
Other long-lived assets such as land improvements, buildings, furnishings, equipment, etc. have limited useful lives. Therefore, the costs of those assets must be allocated to those limited accounting periods. Since land's life is not limited, there is no need to allocate the cost of land to any accounting periods.
2) Warehouse:
Calculation of Depreciation = (Cost - Residual value) / Useful life
= 39,000 - 10,000 / 30
=29,000 / 30
= $ 966.67
3) Machinery:
Calculation of Depreciation = (Cost - Residual value) / Useful life
=22,000 - 6,000 / 5
=16,000 / 5
= $ 3,200
4) Truck:
Calculation of Depreciation = (Cost - Residual value) / Useful life
= 20,000 - 0 / 5
=5,000
Journal entries for each asset for tax year 2014
Depreciation of Warehouse A/c
To Acumulated Depreciation of warehouse A/c
( Adjusting entry for depreciation: straight line method )
966.67
Depreciation of Machinery A/c
To Acumulated Depreciation of Machinery A/c
( Adjusting entry for depreciation: straight line method )
3,200
Depreciation of Truck A/c
To Acumulated Depreciation of Truck A/c
( Adjusting entry for depreciation: straight line method )
5,000
Profit and loss summary A/c
To Depreciation of Warehouse A/c
To Depreciation of Machinery A/c
To Depreciation of Truck A/c
(Closing entry for depreciation expenses)
8,966.67
966.67
3,200
5,000
Accounts Debit CreditDepreciation of Warehouse A/c
To Acumulated Depreciation of warehouse A/c
( Adjusting entry for depreciation: straight line method )
966.67
Depreciation of Machinery A/c
To Acumulated Depreciation of Machinery A/c
( Adjusting entry for depreciation: straight line method )
3,200
Depreciation of Truck A/c
To Acumulated Depreciation of Truck A/c
( Adjusting entry for depreciation: straight line method )
5,000
Profit and loss summary A/c
To Depreciation of Warehouse A/c
To Depreciation of Machinery A/c
To Depreciation of Truck A/c
(Closing entry for depreciation expenses)
8,966.67
966.67
3,200
5,000
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