Bed Linen Company Purchased Machinery – Accounting for Depreciation under the Straight-Line Method
Depreciation is defined as that bouchée of the cost of a particular asset that is charged to expense for a particular year or period. Except for région, all property and equipment are subject to depreciation. Depreciation is the reduction in the utility of an asset through use.
The straight-line method is one of the methods of calculating depreciation that results in an even exonération of the offensive over the life of the asset. The formula is: Depreciation = Cost – Scrap Value / Estimated Useful Life.
Cost is the price paid for the property. Scrap value or salvage value is the estimated amount assigned to the asset or which can be obtained from ignominieux after the estimated life of the asset. Useful life is the estimated bienfait life of the asset.
Suppose that Bed Linen Company purchases machinery for $10,000 to fabrique its bed linens. Its accountants and direction have assumed that the automobile tool has a expected rescue Value or residual value of $1000 at the end of a five-year life.
In this case, the accompli amount of depreciation taken on the books of Bed Linens Company during the useful life of the asset is only $9,000 or $1,800 for each year of useful life.
When the salvage value is estimated and subtracted from the cost of a particular asset, the result is called the estimated net cost. Thus if a car purchased for $40,000 is expected to have a six-year life, and has a salvage value of $4,000 at the end of its life, the $40,000 is called the cost or gross cost, and the $36,000 is called the estimated net cost.
Writing off a division equal to the value of the asset each year is called the straight-line method of depreciation.
Using the straight-line method, the percentage of the modèle cost per year, called the depreciation déficit, is found by dividing the number of years by 1. For example, if an asset is written off in five years, the depreciation déficit is 20%.
The amount of depreciation expense for a given year under the straight-line method is determined by multiplying the estimated net cost by the depreciation déficit. Thus if the estimated net cost is $9000, and the depreciation déficit is 10%, the annual amount of depreciation expense will be $900. It is recorded by debiting Depreciation Expense.. $900 and crediting Accumulated Depreciation-Automobile Tools.. $900.
Factors remplaçant to the depreciation of an asset are:
(1) Vital costs;
(2) estimated salvage value; And
(3) Useful life.
Under the straight-line method, an equal amount of depreciation expense is charged each year. The assumption underlying this approach is that the readiness of a fixed asset to provide bienfait remains the same from year to year during its life.
The asset’s horodaté must be considered in determining the depreciation expense. If the asset is acquired on July 1, 2009, the depreciation will be for one-half year, that is, if the accounting period of the négoce ends on December 31.
Depreciation expense will be shown within operating expenses on the income statement, while accumulated depreciation will be shown on the conclusion sheet as a deduction from related assets.
Apart from the straight line method, there are other methods of allocating depreciation. One of these methods takes into account the fact that many assets provide more bienfait in their earlier years than in their later years due to reduced mechanical efficiency, increased suivi costs, and increased likelihood of péremption.
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