# Depreciation

Q22. Depreciation
On January 1, 20×1, Entity A purchased equipment at $90,000. The equipment is expected to have$9,000 residual value at the end of the useful life of 10 years.
Prepare a journal entry to record the depreciation expense for the year ending December 31, 20×1, using the straight-line depreciation method.

A22. Depreciation expense is recorded on the debit side. Accumulated depreciation is recorded on the credit side.

 Debit Credit Depreciation expense 8,100 Accumulated depreciation 8,100

[Note]
1. Increase in depreciation expense (expense): debit
2. Increase in accumulated depreciation (contra-asset): credit
3. Accumulated depreciation is a contra-asset account which is presented in the asset section of balance sheet as a subtraction from the asset depreciated.
4. Annual depreciation expense = (Cost – Residual value) x 1/Useful life
= ($90,000 –$9,000) x 1/10 = $81,000 x 1/10 =$8,100

[Exercise]
On December 1, 20×1, Entity B purchased equipment at $800,000. The equipment is expected to have$80,000 residual value at the end of the useful life of 10 years. Prepare a journal entry to record depreciation expense for the month of December 20×1, using the straight-line depreciation method.

 Debit Credit Depreciation expense 6,000 Accumulated depreciation 6,000

[Note]
1. Annual depreciation expense = (Cost – Residual value) x 1/Useful life
= ($800,000 –$80,000) x 1/10 = $720,000 x 1/10 =$72,000
2. Depreciation for the month of December 20×1
= Annual depreciation expense x 1/12
= $72,000 x 1/12 =$6,000