course challenge build P&L and Balance sheet
in the first case study under transaction section 2nd point : it acquires a fixed asset of $8000000 and paid in cash. the asset have a salvage value of $ 5,000,000 and an estimated useful life of 15 years. At the beginning of the year the company had a total of $ 150,000,000 in fixed asset, which depreciated at a rate of 10% annually. fixed asset credit item wont be $200000? but you have written $20000000?
Hello!
Thanks for reaching out. Transaction 2 has two parts.
In the first part, you will record depreciation expense on existing fixed assets at the beginning of the period. This depreciation expense will be 15,000,000 (150,000,000 x 10%).
We will then record this depreciation expense of $15Mn as follows:
Debit depreciation expense by $15Mn
Credit Accumulated depreciation by $15Mn.
In the second part, you will first record purchase of fixed assets on cash i.e. Debit Fixed assets by $80Mn and credit Cash by $80Mn. Then we will calculate annual depreciation expense for purchased fixed asset keeping in view its salvage value of $5Mn. It would come down to annual depreciation expense of $5Mn i.e. ($80Mn - $5Mn) / 15 (for years of useful life).
We will then record this depreciation expense of $5Mn as follows:
Debit depreciation expense by $5Mn
Credit Accumulated depreciation by $5Mn.
Hope this helps!
Best,
Ned