Straight Line Method Depreciation

Question

A company purchased equipment on January 1, 2025, for $50,000.

The equipment has an estimated useful life of 5 years and an estimated salvage value of $5,000.

Required:

1. Calculate the annual depreciation expense using the straight-line method.
2. What will be the book value of the equipment at the end of year 1?
3. Prepare the journal entry for recording depreciation at the end of the first year

Answer 1

1) Annual depreciation expense (Straight-Line Method)

Formula:

Depreciation = (Cost − Salvage value) ÷ Useful life

= (50,000 − 5,000) ÷ 5

= 45,000 ÷ 5

= $9,000 per year

Annual depreciation expense = $9,000

2) Book value at the end of Year 1

Formula:

Book value = Cost − Accumulated depreciation

= 50,000 − 9,000

= $41,000

Book value at end of Year 1 = $41,000

3) Journal entry at the end of the first year

Dec. 31, 2025

Dr Depreciation Expense—Equipment $9,000

Cr Accumulated Depreciation—Equipment $9,000

Straight-line depreciation spreads the depreciable cost evenly over the asset’s useful life. The depreciable cost is cost minus salvage value, so $45,000 is expensed evenly over 5 years, giving $9,000 each year.

Answer 2

Accounting for Depreciation: Equipment Purchased on January 1, 2025

Given Information:

1. Cost of Equipment = $50,000
2. Estimated Useful Life = 5 years
3. Estimated Salvage Value = $5,000
4. Depreciation Method = Straight-Line

(i) How to Calculate Annual Depreciation Expense Using the Straight-Line Method

The straight-line method allocates the depreciable cost of an asset evenly over its useful life.

Step 1: Understand the Formula

Annual Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life

Step 2: Plug in the Values

= (50,000 - 5,000) / 5

= 45,000 / 5

= 9,000

Answer:

The annual depreciation expense is $9,000.

(ii) Book Value of the Equipment at the End of Year 1

Step 1: Understand Book Value

Book Value = Cost of Asset - Accumulated Depreciation

At the end of Year 1, only one year's depreciation has been charged.

Step 2: Calculate

Book Value = 50,000 - 9,000 = 41,000

Answer:

The book value of the equipment at the end of the first year is $41,000.

(iii) Journal Entry for Recording Depreciation at the End of Year 1

Depreciation is recorded at the end of each accounting period to allocate part of the asset's cost to the income statement as an expense.

Date: December 31, 2025

Journal Entry:

Debit: Depreciation Expense 9,000

Credit: Accumulated Depreciation 9,000

Explanation:

1. "Depreciation Expense" is an expense account. It increases with a debit and appears on the income statement.
2. "Accumulated Depreciation" is a contra-asset account. It increases with a credit and appears on the balance sheet, reducing the book value of the asset.