On July 1, 2019, Pharoah Company purchased new equipment for $80,000. Its estimated useful life was 8 years with a $16,000 salvage value. On January 1, 2022, before making its depreciation entry for 2022, the company estimated the remaining useful life to be 10 years beyond December 31, 2022. The new salvage value is estimated to be $5,000.

Prepare the journal entry to record the depreciation on December 31, 2019.

The journal entry to record the depreciation on December 31, 2019 is:

Debit Depreciation expense                            $4,000

Credit Accumulated depreciation                    $4,000

(To record accumulated depreciation on December 31, 2019)

Explanation:

Using a straight-line method (method of allocating the cost of an asset over its useful life after considering the salvage value due to wear and tear), the depreciation is calculated as: (Cost - Residual Value) / Useful life

Depreciation = ($80,000 - $16,000) / 8 years

Depreciation = $8,000 yearly

Since we are just looking for the depreciation on December 31, 2019 (July 1, 2019 - December 31, 2019), it will be $8,000 x 0.5 = $4,000.

From (July 1, 2019 - December 31, 2021), 2.5 years, the accumulated depreciation will be $8,000 x 2.5 years = $20,000, while the net book value of the equipment is $80,000 - $20,000 = $60,000.

New depreciation from 2022 onward is ($60,000 - $5,000) / 7.5 years = $7,333 yearly.

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