All right. Here we are with the first
example of
our depreciation methods, this is the
easy method this is a straight line
method.
Remember straight line method only has
one step one major step
uh and so we're going to go through the
process we're also going to journalize
everything
so you can kind of see how this goes but
let's start. So it says on january 1st
papa company
purchased a copy machine with a list
price of fifteen thousand dollars,
they received five percent discount for
cash payment in full
uh the machine was delivered fob
shipping point for 250, papa company paid
1 500 for the installation and setup of
the
machine, papa company expects the machine
to have a five year used life and a
salvage value of four thousand dollars.
So the first thing we need to do before
we do anything before we can depreciate
anything is we've got to figure out what
the tac is,
so in order to do that we need to add up
what's necessary, remember those things
that
is necessary to get it to our facility
and ready for its intended purpose
this being a copy machine, so we always
always always start with the list price
for the invoice cost,
the invoice cost being fifteen thousand
dollars so that's a good
starting point, the next would be the
discount we did get a five percent
discount that we because we paid in cash
in full uh so five percent of fifteen
thousand
is seven hundred and fifty dollars so we
can take that out,
next is the delivery cost uh fob
shipping point so that is the buyer's
responsibility we
are the buyer so we do have to pay that
and that is getting it to our facility
so we will add 250,
and next is the 1500 for the
installation and the setup of machine
that's getting it ready for its intended
purpose
so we will include that as well, and
that's everything so we actually
included everything in this one
minus the useful life and salvage value
that comes later. So if we add that up
that's going to give us a total asset
cost
of 16 000. All right. So that's what we
have to put it on our books for
so we need to go ahead and create the
journal entry for this so this will be
1-1
we will debit the equipment account
make a copy machine of 16 000 and then
we will also credit cash because that's
what we paid for,
so that's just the journal entry to
bring it in that's what we put on our
books for,
then we have the rest of the year's
operational entries we don't know what
those are this could be anything
but then we get to december 31st and we
need to do our first
depreciation adjusting entry. So we need
to figure out what our
depreciation amount is going to be, so
we're going to use the equation total
asset cost
minus my salvage value divided by the
useful life
and that's going to give me my
depreciation per year.
So our total asset cost here we know is
going to be 16 000 we just calculated
it
our salvage value it gives it to us at
four thousand
and our useful life is going to be five
years and if we
do the calculations there that's going
to give us a depreciation per year of
twenty four thousand dollars excuse me
twenty four hundred dollars.
Okay. Now before we move on to the next
one there's something really important
about this equation that I want you to
pay attention to
and that is the numerator the sixteen
thousand minus the four thousand
that amount right there is going to
equal 12 000 and that's what we call the
depreciable base,
okay, that's a very very very significant
number. What that means or what the
depreciation or the appreciable base is
is the maximum an asset can be
depreciated and the minimum company
wants to appreciate,
so that is the max number and min number
you want to hit in total depreciation
over the life of this asset,
okay, we don't want to go past it we
don't want to go under it. So
typically when I do a depreciation
problem what I do is I create a table
a secondary table because the table is
just going to give me extra information
that I can
you know refer back to and answer
questions if necessary
and it's just three columns. I'll
start with year one and then the
the or the years in the first column
depreciation expense, the second column
and accumulated depreciation, and third
column.
So for the first year I'm going to have
depreciation expense with
straight line method that we're using of
2400
and therefore my accumulated
depreciation is going to be 2400,
okay, and then I'm going to put that into
a journal entry
for this year for the first year
sometimes 12-31
depreciation expense because this is
what I've used of that asset
24 000 and then I'm going to put it into
accumulated depreciation
2400 excuse me 24 000 2400. All right.
That's year one,
now let's go to year two now this is why
I said it's
the straight line method is the easy one
because it's one calculation it's 2400
we calculated 2400 per year we're going
to use that over and over and over again
for five years because that's what the
useful life is,
so again adding to our table at the
bottom year two
2400 depreciation expense. This time
we're going to add 2400 to what's
already there
uh which is 2400 so it's going to give
us 4800
but our journal entry is still going to
be the same it's going to be 1231
depreciation expense 2400
and then accumulated depreciation 2400.
Remember
depreciation expense closes out every
year accumulated depreciation carries
over each year so we're just adding that
amount to what's already there.
All right. Year three same thing year
three we're going to add
or put 2400 in a depreciation expense
and also put it in accumulated
appreciation which adds to what's
already there
7200 our depreciation uh journal entry
is going to be 1231,
same thing depreciation expense 2400
accumulated depreciation 2400.
Again the same thing for year four the
same thing 2400 depreciation expense
this time between 9600
accumulated depreciation and our journal
entry is still going to be the same
very repetitive but that is straight
line.
All right. Year five last one we're gonna
do the same thing
year five twenty four hundred
depreciation expense and then we'll
close it out to accumulate depreciation
of twelve thousand
our journal entry is going to be the
same this is the final fifth year
twenty four hundred and 2400 in
depreciation expense accumulated
depreciation.
Now really quickly I want to notice
before we note this before we go to the
next
slide is that notice what is in our
accumulated depreciation in year five,
we have 12 000 in year five, we have 12
000 as our depreciable base that we
stated earlier
that is the point that we want to hit
and if you're doing the straight line
you're going to hit that
because you're taking your depreciable
base and dividing it over however many
years you're going to have in use for
life so.
This is how you do a straight line
depreciation
problem, now there are also a lot of
questions that could come from this
there's a lot of things that come from
this and there's also you know I want to
show you kind of what it looks like from
the balance sheets perspective as well.
So if I was going to look at the balance
sheet for year one
I would have assets a cash whatever it
may be
accounts receivables whatever maybe
whatever the rest of them are going to
be I can list them and then
towards the end I will see equipment
copy machine
for sixteen thousand dollars, that's my
tac and that's what it's going to be
remember I keep it at what I paid for it
at. But I'm gonna take away the
accumulated depreciation so for year one
my accumulated depreciation if we look
down to that table year one under
accumulated depreciation we have twenty
four hundred,
so I will subtract twenty four hundred
away from that
and that's going to give me a book value
for the copy machine
of thirteen six that's for year one. Now
let's look at year two,
the only thing I'm going to change is
the accumulated depreciation because in
year 2 I have 4 800
that will give me the 11 2 as the book
value,
in year 3 it's going to change to 7 200
which means my book value is going to be
88, in year four
it'll be 9 600 which gives me a book
value of
6400, and then in year 5 it'll be the
full 12 000
which is my depreciable base and that's
going to give me a book value of my 4000
which is also my salvage value. Now
what are some of these questions that
can come from a problem like this
because there's a lot of things that's
going on, so let's just say
hypothetically speaking
the question asks us, what is the
depreciation
expense for year two? Well that's why I
like having that table at the bottom
because all I gotta do is look at year
two look at the column that says
depreciation expense and I will find
2400 and as a matter of fact it's gonna
be 2400 for all five years.
Okay. All right. Let's look at another
type of question you can see
you could see what is the accumulated
depreciation balance
at the beginning of year four, well
be careful with this one because
remember all of our adjustments all the
events that are happening are at the end
of the year
so if it's saying what is the beginning
well that means the end hasn't occurred
yet so if it says the beginning of year
four we're actually looking at year
three's information because your four
hasn't occurred yet so we need to go
back to year three
and our accumulated depreciation in year
three would be 7 200,
again coming from the table. Another one
what is the book value at the beginning
of year five
well beginning of year five year five
hasn't occurred yet so we got to go back
to the beginning of or the end of year
four
and so we'll use year four's information
so we'll backtrack it and say
year four our accumulated depreciation
is 9 600 therefore our book value is
going to be 6 400
and that is what the answer to that
question would be, so it just gives you a
couple variations of what questions that
could come from this there's quite a few
as you can as you can see
but this is how you do the straight line
straight line method.
I hope this made sense if you have any
questions please leave them in the
comments below
but other than that you'll have a good
one.