So up to this point when we've been buying our fixed assets, we've been doing it on the 1st day of the year; it's always been January 1st. What happens if we don't buy the asset on the 1st day of the year? How does that affect our depreciation calculations? Let's check it out. So if we purchase an asset in the middle of an accounting period, we have to take partial depreciation for that period. If we didn't buy it on the 1st day of the year, we bought it on some other day, well, we're not going to take a full year's depreciation. We have to prorate it for the amount of time that we've owned it.
For straight line and double declining balance methods, what we're going to do to calculate the partial depreciation is first calculate the full year depreciation and then we're going to adjust it for the time period that we actually owned it. For the units of production method, the beauty of that is we didn't talk about years when we discussed units of production. We were talking about a number of units. So if we bought it in the middle of the year, that probably just means we'll have a smaller number of units in that year, but that doesn't change our calculation at all. We don't really have to adjust our calculation—the calculation already adjusts based on the number of units we produce.
So let me show you what I mean here. We'll start with the straight-line depreciation method. Let's do this example: On October 1st, year 1, Johnson and Johnson Company purchased a delivery truck for $42,000. The company estimated a useful life of 5 years and a residual value. So notice, we didn't buy it on January 1st, and this is a way that teachers love to trick you because you can just gloss over the date, right? You might not pay much attention to these dates, but this is a crucial way for them to take points away, okay? So, you want to be really careful when you're reading dates and make sure that you adjust for these partial time periods.
The first thing we want to do is account for the whole year. We want to just say, what would depreciation have been if it was a full year? So, we're going to do our straight-line method and we're going to find our depreciation expense per year, starting by finding our depreciation expense per year using our formula: Cost ($42,000) minus residual value ($2,000) and we divide it by the useful life of 5 years, and it gives us $8,000 per year. Now, since we didn't own it for a whole year, we only owned it from October 1st through the end of December, that's 3 months out of the 12 months. So we need to prorate this from being a whole year's amount to being for 3 out of the 12 months. What we're going to do is take that $8,000 per year and multiply it by the time factor of the time we've actually owned it, which is 3/12ths, resulting in $2,000 as our depreciation expense.
We would make a journal entry, debiting depreciation expense for $2,000 and crediting accumulated depreciation for $2,000. The net book value is then calculated as the cost paid ($42,000) minus our accumulated depreciation after these 3 months, which is only $2,000. Thus, our net book value is $40,000 at the end of the year.
Notice, this isn't too tough, but this is a way that teachers love to trick you because sometimes we just gloss over those dates when we're not paying close attention. Now, why don't you guys practice some partial depreciation in the next couple of problems? Let's do that now.
