Adjusting Entries: Depreciation quiz #1 Flashcards
Adjusting Entries: Depreciation quiz #1
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What is the purpose of recording depreciation as an adjusting entry?
Depreciation allocates the cost of a long-term asset over its useful life, matching the expense with the benefit derived each year. How is straight-line depreciation calculated for a long-term asset?
Straight-line depreciation is calculated by dividing the asset's cost by its estimated useful life. If a machine is purchased for $50,000 with a useful life of 10 years, what is the annual depreciation expense using the straight-line method?
The annual depreciation expense is $5,000 ($50,000 ÷ 10 years). What accounts are affected when recording annual depreciation expense?
Depreciation expense is debited, and accumulated depreciation is credited. What type of account is accumulated depreciation, and what is its normal balance?
Accumulated depreciation is a contra asset account with a normal credit balance. How does accumulated depreciation affect the net book value of an asset?
Accumulated depreciation reduces the net book value of the asset over time. How do you calculate the net book value of an asset after depreciation?
Net book value is calculated as the asset's original cost minus accumulated depreciation. After one year, what is the net book value of a $50,000 machine with $5,000 annual depreciation?
The net book value is $45,000 ($50,000 - $5,000). What is the net book value of the same machine after two years of depreciation?
The net book value is $40,000 ($50,000 - $10,000). Why is depreciation not recorded as an expense at the time of asset purchase?
At purchase, the asset provides future benefits, so its cost is expensed over its useful life rather than immediately. What is the journal entry to record the purchase of a long-term asset for cash?
Debit the asset account and credit cash for the purchase amount. What is the journal entry to record annual depreciation expense?
Debit depreciation expense and credit accumulated depreciation for the annual amount. Does the depreciation expense account carry a balance from year to year?
No, depreciation expense is an income statement account and resets each year. Does the accumulated depreciation account carry a balance from year to year?
Yes, accumulated depreciation is a balance sheet account and its balance increases each year. What is meant by the 'useful life' of an asset?
Useful life is the estimated period over which an asset is expected to be used by a company. Why is accumulated depreciation called a 'contra asset' account?
Because it offsets the related asset account, reducing the asset's book value. If a company records $5,000 depreciation expense each year for 10 years, what will be the accumulated depreciation at the end of the 10th year?
Accumulated depreciation will be $50,000 ($5,000 × 10 years). What is the net book value of an asset at the end of its useful life if it is fully depreciated?
The net book value will be zero if the asset is fully depreciated and has no residual value. How does depreciation help achieve the matching principle in accounting?
Depreciation matches the cost of an asset with the revenue it helps generate over its useful life. What happens to the asset's original cost on the balance sheet as depreciation is recorded?
The asset's original cost remains unchanged; accumulated depreciation is subtracted to show net book value. Is depreciation expense a cash outflow each year?
No, depreciation expense is a non-cash expense; the cash outflow occurred when the asset was purchased. What is the effect of recording depreciation on the income statement?
Depreciation increases expenses, reducing net income for the period. What is the effect of recording depreciation on the balance sheet?
Depreciation increases accumulated depreciation, reducing the net book value of the asset. Why is it important to estimate the useful life of an asset accurately?
Accurate estimation ensures proper matching of expense with revenue and correct financial reporting.
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