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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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In Year 1, Utica Machinery Company uses the asset from RE11-4 for 7,500 hours. Prepare the journal entry to record the depreciation.

To determine

Prepare journal entry to record the depreciation expense under activity method.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Activity method:  In this method of depreciation, the amount of depreciation is charged based on the units of production or hours worked each year. When the usefulness of an asset is related to the production cost of a unit, this method is more appropriate to use.

Prepare journal entry to record the depreciation expense under activity method

DateAccount Title & ExplanationDebit ($)Credit($)
 Depreciation expense (2)315,000 
     Accumulated depreciation-Cars 315,000
 (To record the depreciation expense incurred during the year)

Table (1)

  • Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by 315,000. Therefore, debit depreciation expense account with 315,000.
  • Accumulated depreciation is a contra asset, and it decreases the value of asset by $315,000. Therefore, credit accumulated depreciation account with $315,000.

Working note (1):

Calculate the deprecation cost per hour...

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