Equipment was purchased by Novak Manufacturing on January 1, 2025, for $152500. Novak’s policy is to adjust its accounts at year-end. Which is the appropriate adjusting journal entry to record depreciation at year-end if the company expects to use the equipment for five years with no salvage value?

Question

Equipment was purchased by Novak Manufacturing on January 1, 2025, for $152500. Novak’s policy is to adjust its accounts at year-end. Which is the appropriate adjusting journal entry to record depreciation at year-end if the company expects to use the equipment for five years with no salvage value?

BlackTom AI · Accepted Answer

Let's break down the scenario and then evaluate each entry.
The equipment cost 152,500 and the company uses straight-line depreciation for five years with no salvage value. Annual depreciation = 152,500 / 5 = 30,500.
Now examine each option in terms of which accounts are debited and which are credited, and whether the amounts align with the computed 30,500.
Option 1: Debiting Accumulated Depreciation – Equipment for 30,500 and crediting Equipment for 30,500. Debits increase assets and accumulated depreciation is a contra-asset account; debiting it would overstate depreciation and reduce the asset value unrealistically. This reverses the normal order of a depreciation entry, so this option is incorrect.
Option 2: Debiting Accumulated Depreciation – Equipment for 30,500 and crediting Depreciation Expense for 30,500. This entry would decrease the accumulated depreciation (a contra-asset) and increase an expense, which does not reflect the standard depreciation process. Therefore, this is incorrect.
Option 3: Debiting Depreciation Expense for 30,500 and crediting Accumulated Depreciation – Equipment for 30,500. This follows the standard practice: record depreciation expense (income statement) and accumulate depreciation (balance sheet contra-asset) by the same amount. The calculations align with 30,500 annual depreciation, so this is the correct entry.
Option 4: Debiting Depreciation Expense for 30,500 and crediting Equipment for 30,500. Crediting Equipment would reduce the recorded cost of the asset rather than clearly recognizing a separate accumulated depreciation account. Since depreciation should accumulate over time against the asset, this is not appropriate.
In summary, only Option 3 mirrors the proper depreciation accounting: a debit to Depreciation Expense and a credit to Accumulated Depreciation – Equipment for 30,500, matching the five-year straight-line depreciation with no salvage value.

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