On January 2, 2018, the Jackson Company purchased equipment to be used in its manufacturing process. Theequipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures madeto acquire the asset were as follows:Purchase price $154,000Freight charges 2,000Installation charges 4,000Jackson’s policy is to use the double-declining-balance (DDB) method of depreciation in the early years of theequipment’s life and then switch to straight line halfway through the equipment’s life.Required:1. Calculate depreciation for each year of the asset’s eight-year life.2. Discuss the accounting treatment of the depreciation on the equipment.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 2, 2018, the Jackson Company purchased equipment to be used in its manufacturing process. The
equipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures made
to acquire the asset were as follows:
Purchase price $154,000
Freight charges 2,000
Installation charges 4,000
Jackson’s policy is to use the double-declining-balance (DDB) method of
equipment’s life and then switch to straight line halfway through the equipment’s life.
Required:
1. Calculate depreciation for each year of the asset’s eight-year life.
2. Discuss the accounting treatment of the depreciation on the equipment.
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