Activation Exercise 9-1: Straight-Line Depreciation

Terms and Definitions

When a company purchases an item that lasts more than one year, the cost of that item should be recorded . If the item is not used in normal operations, it should be classified and recorded as . If the item is used in normal operations, it should classified and recorded as . The cost of a fixed asset should be recorded as depreciation expense .

Understanding the Business Transaction

Depreciation expense measures . A company should record an expense for the cost of a long-term fixed asset . The straight-line method provides for of depreciation expense during each year of the asset's useful life.

Jasmine Company purchased equipment on January 1, 20x1. This is the only equipment that Jasmine company owns. The following information relates to this equipment:

Initial cost		$320,000
Estimated residual value		$19,000
Expected useful life		8 years
Estimated hours of useful life		22,000 hours
Depreciation method		Straight-line
Hours operated during 20x1		2,400 hours
Hours operated during 20x2		2,000 hours

Jasmine Company would report $ of depreciation expense in its December 31, 20x1 income statement and $ of depreciation expense in its December 31, 20x2 income statement.

Recording in the Accounting System

Prepare the journal entry that Jasmine would make to record depreciation on December 31, 20x1:

Dec. 31

Prepare the journal entry that Jasmine would make to record depreciation on December 31, 20x2:

Dec. 31

The journal entry to record depreciation expense is . At December 31, 20x1, Jasmine Company would report equipment on its balance sheet at $, which is the .

Financial Statement Impact

Presley Company purchased equipment on January 1, 20x1. This is the only equipment that Presley company owns. The following information relates to this equipment:

Initial cost	$400,000
Depreciation method	Straight Line

Click here and use the sliders provided for (1) expected useful life and (2) estimated residual value to answer the following questions:

1.	Assume that the equipment has an expected useful life of 10 years and an estimated residual value of $40,000.

a.	Determine depreciation expense for the year ended December 31, 20x1.
	$

b.	Determine depreciation expense for the year ended December 31, 20x2.
	$

c.	The depreciation expense in 20x2 will be the depreciation expense in 20x1.

d.	Determine the book value of the equipment that should be reported on the December 31, 20x1 balance sheet.
	$

e.	As the equipment is depreciated each year, the book value of the equipment that is reported on the balance sheet will .

2.	Assume that the equipment has an expected useful life of 5 years and an estimated residual value of $70,000.

a.	Determine depreciation expense for the year ended December 31, 20x1.
	$

b.	Determine depreciation expense for the year ended December 31, 20x2.
	$

c.	If the estimated residual value remains the same, an increase in the estimated useful life of the equipment will result in annual depreciation expense.

d.	Determine the book value of the equipment that should be reported on the December 31, 20X2 balance sheet.
	$

e.	If the estimated useful life remains the same, an increase in the estimated useful residual value of the equipment will result in annual depreciation expense.