Calculating Depreciation for Utica Machinery Company
How can we calculate the depreciation for an asset purchased by Utica Machinery Company?
The journal entry to record the depreciation for Year 1 is as follows:
- Depreciation Expense: $48,000
- Accumulated Depreciation: $48,000
Understanding Depreciation Calculation
Depreciation Expense Calculation: To calculate depreciation, Utica Machinery Company uses the straight-line method. This method evenly allocates the cost of the asset over its expected useful life.The formula to calculate annual depreciation expense is:
\[ \text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Total Hours of Use}} \times \text{Hours of Use in Year 1} \]
Given Information: - Cost of Asset: $1,200,000 - Salvage Value: $150,000 - Total Hours of Use: 25,000 - Hours of Use in Year 1: 7,500
Plugging in the values: \[ \text{Depreciation Expense} = \frac{1,200,000 - 150,000}{25,000} \times 7,500 = $48,000 \]
Therefore, in Year 1, Utica Machinery Company should record a depreciation expense of $48,000 on the income statement. The Accumulated Depreciation account on the balance sheet will also increase by $48,000, representing the total depreciation charged to date.
Recording depreciation is crucial for accurately reflecting the decreasing value of the asset over time, which impacts the company's financial statements and profitability.