Depreciation Straight Line Method Questions and Answers

We have covered various methods of depreciation. Here we are sharing question answer for Straight Line method.

JK Co. bought a heavy duty machinery for its production process on July 1, 2008 at a price of $ 200,000 with credit terms of 2/10, n/30. In order to purchase this machinery, JK has to incur the following additional expenses on the same date:

Sales tax

15 %

Freight charges

25,000

Transportation from railway to the JK Factory

3,000

Installation charges

8,000

 

It is the company policy to depreciate the machinery over the 10 years. This machine has a scrape value of $ 10,000. Straight line method of depreciation is to be used for charging the depreciation. JK closes its accounting year on December 31 each year.

Required

  1. Calculate the cost of the machine and record the journal entry for acquisition of the machine.
  2. Calculate the annual depreciation expenses.
  3. Calculate the depreciation expense and accumulated depreciation for December 31, 2008, 2009 & 2010.
  4. Record the adjusting entries for depreciation expenses for the year ended December 31, 2008, 2009 & 2010.
  5. Prepare the partial balance sheet as at December 31, 2008, 2009 & 2010.

Solution

Cost of Machine

List price of the machine

 

200,000

Less: cash discount (200,000 x 2 %)

 

(4,000)

Cash price of machinery

 

196,000

Add: other expenses related to machinery acquisition

   

Sales tax 196,000 x 15 %

29,400

 

Freight charges

25,000

 

Transportation

3,000

 

Installation charges

8,000

65,400

Total cost of the machine

 

261,400

 

JK Co.

General Journal Entries

Date

Particulars

Debit

Credit

01 July 2008

Machine

Cash

(recording of purchase of machinery)

196,000

 

196,000

 

Sales tax

Freight charges

Transportation

Installation charges

Cash

(Recording of initial expenses for bringing the machinery into the factory and its intended use.)

29,400

25,000

3,000

8,000

 

 

 

 

65,400

 

Machine

Sales tax

Freight charges

Transportation

Installation charges

(transferring the initial expenses to the machine account)

65,400

 

29,400

25,000

3,000

8,000

 

Annual depreciation Using Straight Line

Annual depreciation expense = (cost – residual value) / Estimated life = (261,400 – 10,000) / 10 = $25,140 per annum

Depreciation expense & Accumulated Depreciation

   

Depreciation expense

Accumulated Depreciation

For Dec 31, 2008

= 25,140 x 6/12

12,570

12,570

For Dec 31, 2009

 

25,140

37,710

For Dec 31, 2010

 

25,140

62.850

 

JK Co.

Journal Entries – Depreciation

Date

Particulars

Debit

Credit

Dec 31, 2008

Depreciation expense

Allowance for depreciation

(recording of depreciation expense for the year 2008)

12,570

12,570

Dec 31, 2009

Depreciation expense

Allowance for depreciation

(recording of depreciation expense for the year 2008)

25,140

25,140

Dec 31, 2010

Depreciation expense

Allowance for depreciation

(recording of depreciation expense for the year 2008)

25,140

25,140

 

JK Co.

Balance Sheet Partial

As on December 31,

 

2008

2009

2010

Machine total cost

261,400

261,400

261,400

Less: accumulated depreciation

(12,570)

(37,710)

(62,850)

Book value of machine

248,830

223,690

198,550