Question 2: Rottino Company purchased a new cutting machine on January 1, 2017, at $17,000, paid in cash. It has been depreciated using the double-declining-balance method based on an estimated salvage value of $0 and an estimated useful life of 5 years. Requirements Prepare Rottino Company's journal entries to record the disposal of the machine on October 31, 2018 in these two independent situations (show your calculations to prove the result): (i) Sold the machine for $7,600 cash. (ii) Exchange the old cutting machine with cash of $1,000 for a new cutting machine. The old machine had a fair value of $7,000.

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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.