On January 1, Imlay Company purchases manufacturing equipment costing $95,000 that is expected to have a five-year life and an estimated salvage value of $5,000. Imlay uses the straight-line depreciation method to allocate costs, and only prepares adjustments at year-end. The adjusting entry needed on December 31 of the first year is:

Question

Quizplus · Accepted Answer

The straight-line depreciation method allocates an equal amount of the asset's cost to each year of its useful life. The calculation for depreciation expense is as follows:

Depreciation expense = (Cost of asset - Estimated salvage value) / Useful life

In this case, the cost of the equipment is $95,000, the estimated salvage value is $5,000, and the useful life is 5 years. Therefore, the depreciation expense for each year is:

Depreciation expense = ($95,000 - $5,000) / 5 years = $18,000 per year

Since adjustments are only made at year-end, the adjusting entry on December 31 of the first year (assuming no partial-year depreciation) will be to debit Depreciation Expense for $18,000 and credit Accumulated Depreciation (a contra-asset account) for $18,000. Over the useful life of the equipment, the accumulated depreciation will increase to the cost of the equipment less its estimated salvage value.

On January 1, Imlay Company Purchases Manufacturing Equipment Costing $95,000