Depreciation: Straight Line quiz #1 Flashcards
Depreciation: Straight Line quiz #1
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What is the purpose of depreciation in accounting?
Depreciation allocates the cost of a fixed asset over its useful life to match expenses with the revenues they help generate, following the matching principle required by GAAP. How does the straight-line method of depreciation calculate annual depreciation expense?
The straight-line method divides the cost of the asset minus its residual value by its useful life to determine equal annual depreciation expenses. What is the formula for calculating straight-line depreciation expense per year?
Depreciation Expense per Year = (Cost of Asset - Residual Value) / Useful Life. What is the depreciable base of an asset?
The depreciable base is the cost of the asset minus its residual (or salvage) value; it represents the total amount to be depreciated over the asset's useful life. If a delivery truck is purchased for $42,000, has a residual value of $2,000, and a useful life of 5 years, what is the annual depreciation expense using the straight-line method?
The annual depreciation expense is $8,000 [($42,000 - $2,000) / 5 years]. What journal entry is made to record annual depreciation expense?
Debit Depreciation Expense and credit Accumulated Depreciation for the amount of annual depreciation. What type of account is Accumulated Depreciation, and how does it affect the asset's value on the balance sheet?
Accumulated Depreciation is a contra asset account that reduces the asset's book value on the balance sheet. How is the net book value of an asset calculated?
Net book value is calculated as the asset's cost minus accumulated depreciation. After one year, what is the net book value of a truck purchased for $42,000 with $8,000 annual depreciation?
The net book value after one year is $34,000 ($42,000 - $8,000). Why is depreciation considered a non-cash expense?
Depreciation is a non-cash expense because it allocates the cost of an asset already paid for; no additional cash is spent when recording depreciation. What is the matching principle, and how does depreciation relate to it?
The matching principle requires expenses to be recorded in the same period as the revenues they help generate; depreciation matches the cost of using an asset to the periods it generates revenue. What are the three key estimates needed to calculate depreciation?
The three key estimates are the asset's initial cost, its useful life, and its residual (salvage) value. What is residual value, and what are some other terms for it?
Residual value is the estimated value of an asset at the end of its useful life; it is also called salvage value, scrap value, or value at the end of life. Does depreciation affect a company's cash flow directly?
No, depreciation does not directly affect cash flow since it is a non-cash expense; the cash was paid when the asset was acquired. How is the cost of a fixed asset typically determined for depreciation calculations?
For depreciation calculations, the cost of a fixed asset is usually given directly and includes all amounts paid to acquire and prepare the asset for use. Why might the book value of an asset differ from its market value?
Book value is based on historical cost minus accumulated depreciation, while market value reflects what the asset could be sold for, which may be higher or lower. How is depreciation shown on the balance sheet?
On the balance sheet, the asset is shown at its historical cost, less accumulated depreciation, with the net book value presented alongside other assets.
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