Equipment acquired on January 2, Year 1, at a cost of $525,000 has an estimated useful life of eight years and an estimated residual value of $45,000. Required: (a)  What is the annual amount of depreciation for the first three years, assuming the straight-line method of depreciation is used? (b)  What is the book value of the equipment on January 1, Year 4? (c)  Assuming that the equipment is sold on January 2, Year 4, for $326,000, journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles. (d)  Assuming that the equipment is sold on January 2, Year 4, for $394,000, journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles.

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A:

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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.