Final answer:
To record the first year year-end adjusting entry for the depreciation expense of a used machine, calculate the annual depreciation using the straight-line method and prorate the amount for the number of months the asset was in use, then debit Depreciation Expense and credit Accumulated Depreciation for that amount.
Step-by-step explanation:
When a business acquires a fixed asset such as a used machine, it is required to allocate the cost of the asset over its useful life, a process known as depreciation. The first year year-end adjusting entry for depreciation involves recording depreciation expense for the partial year that the asset has been in use. If, for instance, the machine has a cost of $10,000, a salvage value of $2,000, and an estimated useful life of 5 years, the straight-line method of depreciation would be applied. The annual depreciation expense would be calculated as:
(Cost - Salvage Value) / Useful Life = ($10,000 - $2,000) / 5 = $1,600 per year
However, if the machine was purchased during the year, you would need to pro-rate the $1,600 for the number of months it was in use. For example, if the machine was used for six months in the first year, the depreciation expense for that year would be $800 ($1,600 / 2). The corresponding journal entry to record this expense at year-end would be:
- Debit Depreciation Expense for $800
- Credit Accumulated Depreciation for $800
This entry reduces net income on the income statement by the amount of the depreciation expense and increases the accumulated depreciation on the balance sheet, which is a contra asset account that reduces the book value of the machine.