Question

Jayhawk Oil Company purchased seismic equipment on March 1, Year 1, at a cost of $100,000. The seismic equipment was used in G&G operations for the remaining of the calendar year (Year 1). Compute straight-line depreciation for 2017, assuming a 10 year life and a salvage value of $20,000. What accounts we affected by the purchase and depreciation of the equipment?

Answer 1

Based on the information available in the question, we can answer as follows:-

Requirement 1:-

The Straight Line Depreciation deduction for 2017 is calculated as follows:-

Depreciation expense = (Cost of the asset - Salvage Value)/Estimated Life of the asset

= ($100,000 - $20,000)/10 years

=$80,000/10

=$8,000 per year

Depreciation expense for 2017 = $8,000 * 10 months/12 months (Since the asset was in use between March 1 - December 31, the depreciation expense is calculated for 10 months)

Depreciation expense for 2017 = $6,667

Requirement 2:-

With respect to the purchase of Seismic equipment, the journal entry would be a debit to the Seismic equipment and a credit to the Cash/Bank account. As such, both the equipment and cash account is affected.

With respect to the Depreciation of the equipment, the journal entry would be a debit to the Depreciation expense account and a credit to the Accumulated Depreciation account.

Please let me know if you have any questions via comments and all the best :) !