Download - 8.4 Depreciation
8.4 Depreciation
What is Depreciation?
Decreasing the value of a fixed asset over its useful life
What do we Depreciate?
FIXED ASSETS ◦Examples:
Office Furniture Automobile Building
◦Except Land We do not depreciate land
Why do we Depreciate?
To show original cost of fixed assets and amount used up over fiscal period
To help financial statements up-to-date
Methods of Depreciation
A. Straight Line Depreciation- Divides up the net cost of the asset equally over
the years of the assets life
B. Declining Balance- A method of calculating the annual depreciation of
an asset as a fixed percentage of the remaining value of the asset
Straight Line
Eg. A business purchases a new company car on January 1, 2006.
Straight Line -- Cost – Salvage Value
Estimate life in years
Estimate value of asset at end of its useful life
Jan. 01, 2006Cost of car $20 000Estimated Salvage Value $5 000Estimated Years of Life 5 Years
20 000 - 5 000
5 years
Salvage Value
Year Cost - Depreciation Used
=Net Book Value
Accumulated Depreciation
2006 $20 000 - 3 000 = 17 000 3 000
2007 17 000 3 000 14 000 6 000
2008 14 000 3 000 11 000 9 000
2009 11 000 3 000 8 000 12 000
2010 8 000 3 000 5 000 15 000
20 000 - 5 000
5 years= 3 000
Expense I/S
Keeps track of total deprecation “CONTRA ASSET” (CR)
Accumulated Depreciation
Accumulated depreciation account is a valuation or contra account, that keeps track of total depreciation
Valuation- one that is used, together with an asset account to show true net value of asset
Jan 01 – Journalize the purchase of the automobile.
Dec. 31, 2006 – Journalize the adjustment to record the 1st year of deprecation
Automobile 20 000 Bank 20 000
Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000
Adj. Entry
Contra Asset
All the same!!
Dec. 31 2007, 2008, 2009, 2010- Journalize the adjusting entries for depreciation for each following year.
Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000
Dec. 31, 2010 – Journalize the entry if the business sells the auto at the end of the five years for $5 000
Bank 5 000Acc. Dep.- Auto 15 000 Automobile 20 000
B) Declining Balance
Declining Balance –Eg. Auto- 30%
Government %, pg. 308 in text
Year Cost - Depreciation Used
=Net Book Value
Accumulated Depreciation
2006 $20 000 - 6 000(20 000 *.3)
= 14 000 6 000
2007 14 000 4 200(14 000 *.3)
9 800 10 200
2008 9 800 2 940(9 800*.3)
6 860 13 140
2009 6 860 2058(6 860*.3)
4802 15 198
2010 4 802 1 440.60(4802*.3)
3 361.40 16 638.60
+ 4 200
+ 2 940
+ 2 058
+ 1 440.60
Journalize the adjusting entries to record the depreciation for:
Dec. 31, 2006 (year 1)
Dec. 31, 2007 (year 2)
Depreciation Expense- Auto 6 000 Accumulated Deprecation- auto 6 000
Depreciation Expense- Auto 4 200 Accumulated Deprecation- auto 4 200
Dec 31, 2008 (year 3)
Depreciation Expense- Auto 2 940 Accumulated Deprecation- auto 2 940
Answer the following:
◦How much depreciation was accumulated (contra asset) after year 3?
$13 140
◦How much depreciation was used up in year 3? 2 940 (expense)
Depreciation calculations are recorded in the Adjustment Columns on the worksheet. You must extend these entries to the appropriate columns!
Depreciation Expense- Auto will extend to the __ side of the __________ because it is treated like any other ______. (p. 307)
Accumulated Depreciation- Auto is extended to the __ side of the ____________. Accumulated Depreciation is an example of a _____ account because it has the opposite balance of normal assets. (p.307)
CR
Income Statement
Expense
DR
Balance Sheet
Contra
Let’s Try it!
8.4 Depreciation pg. 301-310
Read p. 306-307 in textbook, review the worksheet, income statement & balance sheet
Answer Exercise questions #1,2 p. 311-312 (t), p. 242-244 (w)