In 2019, BigDream Inc. just started its operation and decided to produce its inventory in-house. It purchased an assembling machine with a purchase price of $250,000. Also, BigDream paid $5,000 for shipping costs and $5,000 for transportation insurance. The company estimates the machine with 5-year service life and considers a resale value of $5,000 after 5 years of usage. Over the next 5 years, it was also estimated that the machine would produce 100,000 units during its life. The actual units produced during its first-year operation was 10,000. Prepare the journal entry for the purchase and depreciation expense for 2019 under each of the following assumptions and prepare the year-end adjusting entry (a) Straight-line. (b) Double-declining-balance. (c) Units-of-production
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.
In 2019, BigDream Inc. just started its operation and decided to produce its inventory in-house. It purchased an assembling machine with a purchase price of $250,000. Also, BigDream paid $5,000 for shipping costs and $5,000 for transportation insurance.
The company estimates the machine with 5-year service life and considers a resale value of $5,000 after 5 years of usage. Over the next 5 years, it was also estimated that the machine would produce 100,000 units during its life. The actual units produced during its first-year operation was 10,000.
Prepare the
(a) Straight-line.
(b) Double-declining-balance.
(c) Units-of-production.
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