On 2 January 2019, Johnston Ltd purchased a machine with a list price of $234 300 and credit terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $5400 and installation costs of $5280 were also paid. The machine has a useful life of 4 years and a residual value at the end of its useful life of $24 000. Ignore GST. Required Determine the amount that should be debited to the machinery account and prepare a general journal entry to record the purchase, assuming a financial year ending 31 December. Determine the amount of depreciation expense for each of the 4 years ending 31 December assuming use of: the straight-line depreciation method the diminishing balance method of depreciation.
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 2 January 2019, Johnston Ltd purchased a machine with a list price of $234 300 and credit terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $5400 and installation costs of $5280 were also paid. The machine has a useful life of 4 years and a residual value at the end of its useful life of $24 000. Ignore GST.
Required
- Determine the amount that should be debited to the machinery account and prepare a general
journal entry to record the purchase, assuming a financial year ending 31 December. - Determine the amount of
depreciation expense for each of the 4 years ending 31 December assuming use of:
- the
straight-line depreciation method - the diminishing balance method of depreciation.
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