CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE
straight-Line Depreciation
C h a r g i n g a n e q u a l a m o u n t of d e p r e c i a t i o n
expense for a p l a n t asset i n e a c h y e a r of u s e f u l
life Is c a l l e d the straight-line method of depreciation.
H o b b y S h a e k s u m m a r i z e s the d e p r e c i a t i o n
expense for e a c h p l a n t asset to c a l c u l a t e the
total d e p r e c i a t i o n expense recorded o n the
w o r k sheet.
O n J a n u a r y 2, 2 0 X 1 , H o b b y S h a c k bought
a lighted d i s p l a y case tor $ 1 , 2 5 0 . 0 0 , w i t h a n
e s t i m a t e d salvage v a l u e of $ 2 5 0 . 0 0 a n d a n estimated useful lite of 5 years. U s i n g the straight-line
m e t h o d of d e p r e c i a t i o n , the a n n u a l depreciation
expense, $ 2 0 0 . 0 0 , i s t h e s a m e tor e a c h year i n
w h i c h the asset i s u s e d .
9
(
10
/
11
s
IZ
» T E P S
•
Original
Estimated
Estimated Total
Cost
Salvage V a l u e
Depreciation Expense
$1,250.00
$250.00
O
$1,000.00
Estimated Total
Years of Estimated
Annual
Depreciation Expense
Useful Life
Depreciation Expense
$1,000.00
5
S T E P S
•
•
S T E P S
STEPS
S T E P S
O
•
S T E P S
$200.00
•
S T E P S
•
S T E P S
S T E P S
CALCULATING ANNUAL DEPRECIATION EXPENSE
Subtract the asset's estimated salvage value from the asset's original cost. This difference is the estimated
total depreciation expense for the asset's entire useful lite.
0
Divide the estimated total depreciation expense by the years of estimated useful lite. The result is the annual
depreciation expense.
Calculating A c c u m u l a t e d Depreciation
T h e total a m o u n t of d e p r e c i a t i o n expense t h a t
h a s b e e n recorded s i n c e the p u r c h a s e of a p l a n t
asset i s c a l l e d accumulated depreciation. T h e
a m o u n t a c c u m u l a t e s e a c h y e a r of the p l a n t
asset's u s e f u l lite.
F i r s t , the d e p r e c i a t i o n expense t h a t h a s
a c c u m u l a t e d over a l l p r i o r y e a r s i s determined.
S e c o n d , the d e p r e c i a t i o n expense tor the current
y e a r i s c a l c u l a t e d . T h i r d , the p r i o r accumulated
d e p r e c i a t i o n a n d the c u r r e n t d e p r e c i a t i o n
expense are a d d e d .
20X2 Accumulated
Depreciation
20X3 Accumulated
-1-
$400.00
20X3 Depreciation Expense
+
$200.00
Calculating Book Value
.
T h e o r i g i n a l cost of a p l a n t asset m i n u s a c c u m u lated d e p r e c i a t i o n i s c a l l e d t h e book value of a plant
O r i g i n a l Cost
$1,250.00
-
=
Depreciation
$600.00
asset. T h e b o o k v a l u e i s c a l c u l a t e d b y subtracti n g the a c c u m u l a t e d d e p r e c i a t i o n from the
o r i g i n a l cost of the asset.
Accumulated Depreciation
E n d i n g Book V a l u e
$600.00
$650.00
P r o c e d u r e s tor r e c o r d i n g t h e a c c u m u l a t e d
d e p r e c i a t i o n a n d b o o k v a l u e of i n d i v i d u a l assets
are p r e s e n t e d i n C h a p t e r 18.
424
Chapter 14
Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
38
I
39
L
Xtra!
Study Tools
accountingxtra.swlearning.com
• terms review
current assets
plant assets
depreciation expense
estimated salvage value
straight-line method ot
depreciation
accumulated depreciation
book value ot a plant asset
• audit your understanding
1.
What are the two categories ot assets?
2.
What three tactors are used to calculate a plant asset's annual
depreciation expense?
work together 14-5
Planning and recording adjustments for depreciation
Use the work sheet trom Work Together 14-4. Your instructor will guide you through the following example.
1.
Calculate depreciation expense tor a computer printer costing $1,600; estimated salvage value, $100.00, useful lite, 5 years.
2.
Calculate the book value ot the computer printer at the end ot its second year ot service.
3.
On December 31, Coastal Aquatics determined the total depreciation expense: office equipment, $6,120.00; store equipment,
$5,060.00. Plan the work sheet adjustments and label the adjustments (f)w(i (g). Save your work to complete Work
Together 14-6.
on your own 14-5
Planning and recording adjustments for depreciation
Use the work sheet from On Your Own 14-4. Your instructor will guide you through the following example. Work independently
to complete this problem.
426
1.
Calculate depreciation expense tor a display rack costing $2,350.00; estimated salvage value, $600.00, useful lite, 7 years.
2.
Calculate the book value ot the display rack at the end ot its third year ot service.
3.
On December 31, Sonoma Treasures determined the total depreciation expense: office equipment, $5,184.00; store
equipment, $6,480.00. Plan the work sheet adjustments and label the adjustments (f)an6 (g). Save your work to complete
On Your Own 14-6.
Chapter 14
Distributing Dividends and Preparing a Work Sheet tor a IVlerchandlsIng Business
WORK TOGETHER, p. 426
N
ggg
^
Planning and recarding adjustments for depreciation
3
1.
CO
-u
Q
^
Original Cost
Estimated Saivage Value
Estimated Total Depreciation Expense
.
.
- r - _ Years of Estimated Useful Life =
A n n u a l Depreciation Expense
2.
Original Cost
Depreciation: Year 1
Year 2
Book Value
O
14-5
O
o
@
-
-
O N YOUR O W N , p. 426
Planning and recording adjustments for depreciation
1.
c
X
^
K
Original Cost
Estimated Saivage Value
Estimated Totai Depreciation Expense
m
Z
n
2.
z
>
"1
fm
z
o
Original Cost
Depreciation: Year 1
Y
e a r s2
Year
Book Value
m
^ _ Years of Estimated Useful Life =
A n n u a l Depreciation Expense