Formula 1 Is Equivalent To Formula 4 Both Calculate Cost. Bed Linens Company Purchased Machinery – Accounting For Depreciation Under the Straight-Line Method

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Bed Linens Company Purchased Machinery – Accounting For Depreciation Under the Straight-Line Method

Depreciation is defined as a portion of the cost of a fixed asset that is charged to expenses for a particular year or period. Except for land, all property and equipment are subject to depreciation. Depreciation is the decrease in the utility of an asset through use.

The straight-line method is one of the methods of calculating depreciation that results in an even distribution of charges over the life of the asset. The formula is: Depreciation = Cost – Scrap Value / Estimated Useful Life.

Cost is the price paid for the property. Scrap value or salvage value is the estimated amount assigned to the asset or which can be recovered from the sale of the asset after its estimated life. Useful life is the estimated service life of an asset.

Suppose that a bed linen company purchases machinery for $10,000 to manufacture its bed linens. Its accountants and management assumed that the machine tool would be one rescue A value or residual value of $1000 at the end of its five-year life.

In this case, the total amount of depreciation to be charged on Bed Linens Company’s books over the useful life of the asset is only $9,000 or $1,800 for each year of useful life.

When the salvage value is estimated and subtracted from the cost of the fixed asset, the result is called the estimated net cost. Thus if a car purchased for $40,000 is expected to have a six-year life, and has a salvage value of $4,000 at the end of its life, the $40,000 is called the cost or gross cost and the $36,000 is called the estimated net cost.

Charging off an equal portion of the asset’s cost each year is called the straight-line method of depreciation.

Using the straight-line method, the percentage of original cost charged each year, known as the depreciation rate, is obtained by dividing it by the number of years. For example, if an asset is to be written off over five years, the depreciation rate is 20%.

The amount of depreciation expense for a given year is determined by multiplying the estimated net cost by the depreciation rate under the straight-line method. Thus if the estimated net cost is $9000, and the depreciation rate is 10%, the annual amount of depreciation expense will be $900. This is recorded by debiting Depreciation Expense.. $900 and crediting Accumulated Depreciation-Machine Equipment.. $900.

Factors related to depreciation of assets are:

(1) Original cost;

(2) estimated salvage value; and

(3) Useful life.

Under the straight-line method, an amount equal to the depreciation expense is charged each year. The concept underlying this method is that the readiness of a fixed asset to provide service remains the same from year to year throughout its life.

The asset’s date must be considered when determining depreciation expense. If the property was acquired on July 1, 2009, the depreciation will be for one and a half years, that is, if the accounting period of the business ends on December 31.

Depreciation expense will be shown among operating expenses on the income statement, while accumulated depreciation will be shown on the balance sheet as a deduction from the related assets.

There are other ways to apportion depreciation besides the straight-line method. One of these methods takes into account the fact that many assets serve more in their earlier years than in their later years, reducing mechanical efficiency, increasing maintenance costs, and increasing the likelihood of obsolescence.

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