Depreciation Methods and Journal Entries for Buddy Corporation’s New Machine

Introduction

Depreciation is an essential accounting concept that helps allocate the cost of long-term assets over their useful lives. Buddy Corporation purchased a new machine for production on January 1, 2018, with a cost of $175,000, a salvage value of $25,000, a useful life of 5 years, and an estimated total working hours of 25,000. The company used the machine for production during the years 2018 to 2023. In this essay, we will explore and calculate the depreciation expense for Buddy Corporation’s new machine using three different methods: Straight-Line, Activity, and Double-Declining Balance.

Straight-Line Method

The Straight-Line method evenly distributes the depreciation expense over the useful life of the asset. The formula to calculate annual depreciation using this method is:

Depreciation Expense = (Cost – Salvage Value) / Useful Life

For Buddy Corporation’s machine: Depreciation Expense = ($175,000 – $25,000) / 5 = $30,000 per year

Journal Entry for each year: Date: 12/31/20XX Depreciation Expense $30,000 Accumulated Depreciation $30,000

2. Activity Method: The Activity method, also known as the Units of Production method, calculates depreciation based on the actual usage or production activity of the asset. The formula to calculate depreciation using this method is:

Depreciation Expense = (Hours Used in the Year / Total Estimated Hours) * (Cost – Salvage Value)

For Buddy Corporation’s machine, with the hours used during each year:

• 2018: ($5,750 / 25,000) * ($175,000 – $25,000) = $30,000
• 2019: ($5,000 / 25,000) * ($175,000 – $25,000) = $28,000
• 2020: ($4,250 / 25,000) * ($175,000 – $25,000) = $23,200
• 2021: ($5,500 / 25,000) * ($175,000 – $25,000) = $33,000
• 2022: ($4,500 / 25,000) * ($175,000 – $25,000) = $28,000

Journal Entry for each year (using rounded values): Date: 12/31/20XX Depreciation Expense $XX,XXX Accumulated Depreciation $XX,XXX

3. Double-Declining Balance Method: The Double-Declining Balance method accelerates depreciation, allocating a larger portion of the asset’s cost as an expense in the earlier years. The formula to calculate depreciation using this method is:

Depreciation Expense = (Book Value at the Beginning of the Year / Useful Life) * 2

For Buddy Corporation’s machine, assuming no residual value:

• Year 1: ($175,000 / 5) * 2 = $70,000
• Year 2: (($175,000 – $70,000) / 5) * 2 = $42,000
• Year 3: (($175,000 – $70,000 – $42,000) / 5) * 2 = $25,200
• Year 4: (($175,000 – $70,000 – $42,000 – $25,200) / 5) * 2 = $15,120
• Year 5: (($175,000 – $70,000 – $42,000 – $25,200 – $15,120) / 5) * 2 = $9,072

Journal Entry for each year (using rounded values): Date: 12/31/20XX Depreciation Expense $XX,XXX Accumulated Depreciation $XX,XXX

Conclusion

In this essay, we explored and calculated the depreciation expense for Buddy Corporation’s new machine using three different methods: Straight-Line, Activity, and Double-Declining Balance. Each method provides a unique perspective on how depreciation is allocated over the asset’s useful life. The choice of method depends on the company’s financial goals and the asset’s pattern of usage. Properly recording depreciation helps accurately reflect the asset’s decreasing value over time and ensures accurate financial reporting for the company.