A company purchased equipment with a cost of $96,000. Residual value at the end of a six-year useful life is estimated to be $24,000. The equipment is also expected to produce 10,000 units. Actual units produced over the six years are 1,000; 1,800; 2,200; 2,400; 2,000; 1,600.Required:Calculate depreciation expense, accumulated depreciation, and book value for each of the six years using (a) straight-line, (b) double-declining-balance, and (c) activity-based. In addition, record the adjusting entry for depreciation expense at the end of the third year under each method. How would your answers change if the company had initially estimated the residual value to be $16,000 and the useful life to be five years?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A company purchased equipment with a cost of $96,000. Residual value at the end of a six-year useful life is estimated to be $24,000. The equipment is also expected to produce 10,000 units. Actual units produced over the six years are 1,000; 1,800; 2,200; 2,400; 2,000; 1,600.
Required:
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