Calculate depreciation expense on the building, machinery, and equipment for 2020. Show your calculations. Prepare the journal entries to record (i) depreciation on the portion of machinery sold on September 30, 2021 and (ii) the sale of machinery. Show all calculations before you prepare your journal entries. Use the below format for you
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.
On March 1, 2020, the Ottoman Company purchased land, building, machinery and equipment for $2,000,000. According to independent appraisals, the fair values were $1,500,000 (Land), $1,200,000 (Building), $800,000 (Machinery), and $500,000 (Equipment).
The following information is also provided:
|
ASSET |
ESTIMATED RESIDUAL VALUE |
ESTIMATED USEFUL LIFE IN YEARS |
|
Land |
N/A |
N/A |
|
Building |
None |
20 |
|
Machinery |
10% of cost |
10 |
|
Equipment |
$20,000 |
5 |
Required:
- Calculate
depreciation expense on the building, machinery, and equipment for 2020. Show your calculations. - Prepare the
journal entries to record (i) depreciation on the portion of machinery sold on September 30, 2021 and (ii) the sale of machinery. Show all calculations before you prepare your journal entries. Use the below format for your journal entries.Date
Accounts
Debit
Credit
Sep 30, 2021
Sep 30, 2021
Journal entry:
Journal entry is the book of original entry where first transactions are recorded in the books of account. In the accounting cycle, the first step an accountant or a bookkeeper follows is the journal entry. It consists of a debit side and credit side balances. Both debit side balance and credit side balance should be matched.
a)
Calculation of Depreciation
|
Assets |
Fair value |
Residual Value |
Estimated Useful Life |
Depreciation value |
|
Land |
$1,500,000 |
- |
|
|
|
Building |
$1,200,000 |
- |
20 |
60,000 |
|
Machinery |
$800,000 |
10% of cost |
10 |
72,000 |
|
Equipment |
$500,000 |
20,000 |
5 |
96,000 |
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