On January 1, Year 1, the Dartmouth Corporation paid $20,000 for major improvements on a two-year-old manufacturing machine. Although the expenditure did not change the expected useful life, it greatly increased the productivity of the machine. Prior to this transaction, the machine account in the general ledger was listed at $93,000, and the accumulated depreciation account was $30,000. Dartmouth uses the straight-line depreciation method. The estimated useful life was six years, and the estimated salvage value was $4,300. Required: a.Immediately after the January 1, Year 1 transaction, what is the book value of the asset on Dartmouth books? b. Compute the depreciation for the machine for December 31, Year 1.
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.
Depreciation is defined as the accounting method implemented to allocate the cost of a long-term asset over its useful life. This is done in order to match the cost of the asset with the revenue it generates over its useful life, rather than recognizing the full cost as an expense in the year of purchase.
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