On March 1, ABC Company purchased equipment for $60,000 cash. The equipment has an estimated useful life of 5 years and a residual value of $5,000. Record (a) the purchase, and (b) depreciation expense for the first year using the straight-line method. The company's fiscal year ends December 31.

Step 1 — Record the purchase (Mar 1)

The equipment is recorded at its full cost; cash decreases by the same amount.

Step 2 — Compute annual depreciation

Straight-line formula:

Annual depreciation = (Cost − Residual value) ÷ Useful life

= ($60,000 − $5,000) ÷ 5 = $11,000 per year

Step 3 — Record depreciation for year 1 (Dec 31)

Even though the asset was bought partway through the year, US GAAP textbook problems often assume a full year of depreciation in year 1 unless otherwise stated.

Why this works

• Equipment sits on the balance sheet at historical cost ($60,000) and is never written down for normal wear.
• Accumulated Depreciation is a contra-asset that builds up each year. After year 1 it's $11,000, after year 2 it's $22,000, and so on until year 5 when book value reaches the $5,000 residual.
• Depreciation Expense flows to the income statement, lowering net income (and taxes) without affecting cash.