Cadillac Construction Company uses the retirement method to determine depreciation on its small tools. During 2019, the first year of the company’s operations, tools were purchased at a cost of $11,500. In 2021, tools originally costing $4,400 were sold for $850 and replaced with new tools costing $5,000. Required: 1. Prepare journal entries to record each of the above transactions. 2. Prepare journal entries to record each of the above transactions, assuming that the company uses the replacement depreciation method instead of the retirement method.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Cadillac Construction Company uses the retirement method to determine
Required:
1. Prepare
2. Prepare journal entries to record each of the above transactions, assuming that the company uses the replacement depreciation method instead of the retirement method.
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