Adjusting Entry: Estimated Annual Depreciation Of The Proper

Adjusting Entrythe Estimated Annual Depreciation Of The Property And E

Adjusting entry The estimated annual depreciation of the property and equipment is 10% per year of its acquisition cost. The library is part of the doctor's investment at the start of his practice on January 1, 2010, while the medical equipment was acquired in two groups: $48,000 was acquired August 1, 2010, and the remaining amount was acquired six months after the first acquisition. Given: Library $155,000 (debit), Accumulated Depreciation - Library $15,500 (credit), Medical Equipment $96,000 (debit), Accumulated Depreciation - Equipment $2,000 (credit).

Paper For Above instruction

The accurate calculation of depreciation expense is essential in preparing financial statements that fairly present the financial position of a business. In the healthcare industry, medical practices often incur significant investments in property and equipment, which require systematic depreciation to reflect the usage and aging of these assets over time. This paper discusses the process of adjusting entries for depreciation based on the provided scenario, emphasizing the principles, calculations, and impact on financial reporting.

Depreciation is an accounting method used to allocate the cost of tangible assets over their useful lives. The straight-line depreciation method, which is frequently employed, spreads the cost evenly across the estimated useful life of the asset. In this scenario, the depreciation rate is 10% annually of the acquisition cost. The main assets involved are the library and medical equipment, which are part of the doctor's investment at the inception of practice in 2010.

Regarding the library, its acquisition cost is $155,000. Since depreciation is 10% per year, the annual depreciation expense for the library is calculated as:

  • Annual Depreciation for Library = $155,000 × 10% = $15,500

Given that the previous accumulated depreciation for the library is $15,500, it indicates that at the year's end, the book value of the library is considering that the entire depreciation has been accounted for. If this is for the current year, the adjusting entry would involve debiting Depreciation Expense $15,500 and crediting Accumulated Depreciation - Library $15,500.

For medical equipment, the total acquisition was in two groups:

  • First Group: $48,000 acquired August 1, 2010.
  • Second Group: The remaining balance (which can be calculated as $96,000 minus $48,000 equals $48,000) acquired six months after the first, i.e., around February 1, 2011.

The depreciation expense must be prorated based on the period each asset was held during the accounting period. Since the starting date is January 1, 2010, and the acquisitions occurred within that year as specified, the depreciation for the medical equipment needs to reflect the time held during the year.

For the first group, acquired August 1, 2010, for the period August 1 to December 31 (5 months). The depreciation expense for this group is:

  • Depreciation = $48,000 × 10% × (5/12) = $2,000

The second group was acquired six months after the first, around February 1, 2011, meaning it was not in use during 2010, thus, it does not accrue depreciation within 2010. However, for the subsequent accounting period, depreciation would be computed accordingly.

For the current year's adjustment, considering the existing accumulated depreciation is $2,000, the journal entry involves debiting Depreciation Expense - Equipment $2,000 and crediting Accumulated Depreciation - Equipment $2,000.

In conclusion, the adjusting entries ensure that depreciation expenses reflect the appropriate allocation of the assets' costs over their useful lives, aligning financial statements with accounting principles. The comprehensive approach considers the acquisition dates, asset costs, depreciation rates, and periods held, resulting in precise financial reporting.

References

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  • Financial Accounting Standards Board (FASB). (2022). Accounting Standards Codification (ASC) 360: Property, Plant, and Equipment.
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  • Investopedia. (2023). Depreciation Definition and Calculation. Retrieved from https://www.investopedia.com/terms/d/depreciation.asp
  • AccountingTools. (2022). Adjusting Entry for Depreciation. Retrieved from https://www.accountingtools.com/articles/adjusting-entry-for-depreciation.html
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