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

Question

Quizplus · Accepted Answer

The straight-line depreciation method allocates an equal amount of depreciation expense each year. To determine the annual depreciation expense, we need to subtract the estimated residual value from the cost of the equipment and divide the result by its estimated useful life. 
($95,000 - $5,000) / 5 years = $18,000
Therefore, the adjusting entry needed on December 31 is to debit Depreciation Expense for $18,000 and credit Accumulated Depreciation for $18,000. This will bring the equipment's book value to $5,000 at the end of its estimated useful life.

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