Explanation Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolescence. Prepare journal entry to record the cost of the van as follows: Date Account Title and Explanation Debit ($) Credit ($) January 1, Year 1 Equipment (1) 27,670 Cash 27,670 (To record the costs of van) Table (1) Working Note: Calculate the costs of van. Costs of van= ( Purchase cost+Sales tax ) = $ 25 , 860 + $ 1 , 810 = $ 27 , 670 (1) Equipment is an asset account and it is increased. Therefore debit equipment account. Cash is an asset account and it is decreased. Therefore credit cash account. Prepare journal entry to record the betterment of the van as follows: Date Account Title and Explanation Debit ($) Credit ($) January 3, Year 1 Equipment 1,850 Cash 1,850 (To record the betterment of van) Table (2) Equipment is an asset account and it is increased. Therefore debit equipment account. Cash is an asset account and it is decreased. Therefore credit cash account. Prepare journal entry to record the depreciation expense as follows: Date Account title and Explanation Post Ref. Debit ($) Credit ($) December 31, Year 1 Depreciation expense (3) 5,124 Accumulated depreciation 5,124 ( To record the depreciation expense ) Table (3) Working Note: Calculate the depreciable cost. Amount ($) Total original cost 27,670 Add: Cost of betterment 1,850 Revised cost of equipment 29,520 Less: Revised salvage ( $ 3 , 670 + $ 230 ) 3,900 Depreciable Cost $25,620 Table (4) …… (2) Calculate the depreciation expense (for year 1) after January 3 rd betterment. Depreciation = Depreciable cost (2) Estimated useful life of the asset = $ 25 , 620 5 years = $ 5 , 124 (3) Depreciation expense is a component of stockholder’s equity. It decreases the stockholder’s equity. Thus, depreciation expense is debited. Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value

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ISBN: 9781260158601

Author: Wild

Publisher: MCG

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Solution Summary: The author explains depreciation expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolescence.

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