Adjusting Entries | Part 2
Depreciation & Bad Debts
Depreciation Calculation
Equipment
Cost = 10,000
Residual value = 0
Useful life = 5 years
10,000 - 0
----------
5
----------
5
2,000 per year
Vehicle
Cost = 18,000
Residual value = 3,000
Useful life = 6 years
18,000 - 3,000
----------
6
----------
6
2,500 per year
Furniture
Cost = 9,000
Residual value = 0
Useful life = 3 years
9,000 - 0
----------
3
----------
3
3,000 per year
Depreciation Journal Entries
Equipment
Dr
Depreciation Expense
2,000
Depreciation Expense
2,000
Cr
Accumulated Depreciation
2,000
Accumulated Depreciation
2,000
Vehicle
Dr
Depreciation Expense
2,500
Depreciation Expense
2,500
Cr
Accumulated Depreciation
2,500
Accumulated Depreciation
2,500
Furniture
Dr
Depreciation Expense
3,000
Depreciation Expense
3,000
Cr
Accumulated Depreciation
3,000
Accumulated Depreciation
3,000
Identify the Account Type
Depreciation Expense
➧ Expense
Accumulated Depreciation
➧ Contra Asset
Accounts Receivable
➧ Asset
Allowance for Doubtful Accounts
➧ Contra Asset
Bad Debts Expense
➧ Contra Asset
Bad Debts Adjustment
1. Calculate bad debts expense
Accounts Receivable balance = $20,000
Estimated bad debts = 5%
Calculation
20,000 × 5% = 1,000
2. Prepare the adjusting journal entry
Dr
Bad Debts Expense
1,000
Bad Debts Expense
1,000
Cr
Allowance for Doubtful Accounts
1,000
Allowance for Doubtful Accounts
1,000
Mini Case Study
A company owns machinery costing $25,000, residual value $5,000, useful life 4 years.
➛ Accounts Receivable = $40,000
➛ Estimated uncollectible receivables = 4%
Questions
1. Calculate annual depreciation.
25,000 - 5,000
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4
----------
4
5,000
2. Prepare depreciation adjusting entry.
Dr
Depreciation Expense
5,000
Depreciation Expense
5,000
Cr
Accumulated Depreciation
5,000
Accumulated Depreciation
5,000
3. Calculate bad debts expense.
40,000 × 4% = 1,600
4. Prepare bad debts adjusting entry.
Dr
Bad Debts Expense
1,600
Bad Debts Expense
1,600
Cr
Allowance for Doubtful Accounts
1,600
Allowance for Doubtful Accounts
1,600
5. Show how machinery appears on the Balance Sheet after one year.
Description
Machinery | Cost
Less: Accumulated Depreciation
Net Book Value
Machinery | Cost
Less: Accumulated Depreciation
Net Book Value
Amount
25,000
5,000
20,000
25,000
5,000
20,000
Quick Quiz
Is depreciation a cash expense?
➛ No
What account accumulates depreciation over time?
➛ Accumulated Depreciation
Which method spreads cost evenly?
➛ Staight-Line Method
Why do we estimate bad debts?
➛ To match potential losses with revenue earned
Which account reduces Accounts Receivable?
➛ Allowance for Doubtful Account
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