Question

Eagle Company purchased a car for its business activities on September 1, 2019, for $45,000. The expected useful life of the car is 4 years and its residual (salvage) value is $15,000. Company uses straight line depreciation method for its cars.

REQUIRED: Compute the depreciation expense for 2019. Record the necessary adjusting entry (journal entry) as of December 31, 2019 for depreciation and show their effects on the financial statements (Income Statement for 2019 and Balance sheet as of December 31, 2019).

Answer 1

· Working

A	Cost	$            45,000.00
B	Residual Value	$            15,000.00
C=A - B	Depreciable base	$            30,000.00
D	Life [in years]	4
E=C/D	Annual SLM depreciation	$              7,500.00

· Requirements

[1] Depreciation expense for 2019 = $ 7500 x 4 months / 12 months = $ 2500

[2]

Date	Accounts title	Debit	Credit
31-Dec-19	Depreciation expense - Vehicle	$        2,500.00
	Accumulated Depreciation - Vehicle		$    2,500.00
	(depreciation expense recorded)

[3]

Income Statement effect:
Depreciation expense will INCREASE, thereby decreasing the Net Income.

Balance Sheet effect:.
Accumulated Depreciation will increase, thereby decreasing the amount of total assets.
Also, the Stockholder’s Equity will decrease, as decrease in net income = decrease in retained earnings.