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Fixed Asset and Depreciation Entries 1. What is the AJE required on December 31, 2018 for our company's pretzel tying machine? 3 What is the machine's book value after the entry above is posted? Show your calculation 2. Inguinal Mig purchased a speciality lathe for $286,500 on September 30 2020. They paid $20,000 cash and gave the seller a note payable for the balance of the cost on the date of purchase Inguinal estimates the fathe will have a useful life of 15 years and will retain a salvage value of $2,000. The company uses straight-line depreciation and takes depreciation to the nearest month in the year of acquisition What is the entry on the date of purchase? What are the required adjusting journal entries on 12/31/20 and 12/31/21 for this asset? Machine Acc Dep - Machine Depreciation Expense Special Adjusting Journal Entries Chapter 2. p. 65 Depreciation Expense Assets with physical substance and with expected future useful lives in excess of a year on their purchase date are called fixed assets or property, plant, and equipment. We need to record an expense over the useful life of these assets to mark their contribution to generating revenue for the business. This expense is called depreciation expense. Depreciation is a process of allocating all or part of the cost of a fixed asset to expense over the estimated useful life of the asset. We will use the straight-line depreciation method (pp. 574-5). The straight-line method, as with other depreciation methods, requires several estimates on the part of management. In our problems, those estimates will be given to you. Let's say our business purchased a pretzel-tying machine for $120,000 on April 1, 2017 4/1/17 120,000 Machine Note Payable To record purchase of machine. 120,000 We estimate its useful life to be 10 years, and that the machine will have a salvage or residual value at the end of 10 years of $4,000. The generic straight-line calculation is as follows: We estimate its useful life to be 10 years, and that the machine will have a salvage or residual value at the end of 10 years of $4,000. The generic straight-line calculation is as follows: (Cost - salvage)/ Useful life = 1 year's depreciation expense We will be taking partial year depreciation in the year of acquisition unless the asset is acquired on January 1. In our example, the calculation looks like this: (120,000 - 4,000) / 10 = $11,600 depreciation expense per year In 2017, though, we only used the asset for 9 months, so we take 9/12 of the annual amount to arrive at depreciation expense of $8,700 for 2017. The resulting deferred expense AJE is 12/31/17 Depreciation Expense 8,700 Accumulated Depreciation -- Machine 8,700 To record depreciation expense on the machine for the year. Accumulated Depreciation -- Machine is a contra-asset account, meaning its normal balance is a credit (contrary to asset accounts) and that it is related to the Machine account. Machine 120,000 A/D - Machine 8,700 The difference between the balance in the Machine account and the balance in the A/D - Machine account gives us our asset's book value, carrying value, or basis -- an amount denoting the remaining investment in the asset. Cost $ 120,000 Less A/D - Machine (8,700) Book value $ 111,300