LO8-8 Show how continuing expenditures for operational assets affect financial statements.

False

All costs associated with a machine, after it is operational, are expensed in the period they are incurred. This statement is:

Multiple Choice

• true.

• false.

Truck 58,000, Accumulated Depreciation (20,000)

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the following balances:

Truck 48,000

Accumulated Depreciation (20,000)

Also, on January 1, Year 3 the company paid $10,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Which of the following shows the account balances after the engine replacement on January 1, Year 3?

Multiple Choice

• Truck 58,000, Accumulated Depreciation (20,000)

• Truck 48,000, Accumulated Depreciation (10,000)

• Truck 58,000, Accumulated Depreciation (30,000)

• Truck 48,000, Accumulated Depreciation (30,000)

$35,000.

Explanation

Depreciation expense for Year 1 and Year 2: ($48,000 Cost − $8,000 Salvage) ÷ 4 Year life = $10,000

Year	Depreciation Expense	Accumulated Depreciation
1	$ 10,000	$ 10,000
2	$ 10,000	$ 20,000

Book value before improvement = $48,000 Cost − $20,000 Accumulated depreciation = $28,000

Book value after improvement = $58,000 Cost − $20,000 Accumulated depreciation = $38,000

Depreciation expense for Year 3 = (Book value − Salvage value) ÷ Remaining useful life

Depreciation expense for Year 3 = ($38,000 − $8,000) ÷ 2 = $15,000

Year 3 Balance in accumulated depreciation = Beginning balance January 1, Year 3 + Year 3 Depreciation expense

Year 3 Balance in accumulated depreciation = $20,000 + $15,000 = $35,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the following balances:

Truck 48,000

Accumulated Depreciation 20,000

Also, on January 1, Year 3 the company paid $10,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Based on this information, the balance in the accumulated depreciation shown on the Year 3 balance sheet is:

Multiple Choice

• $15,000.

• $35,000.

• $20,000.

• $28,000.

$35,000.

Explanation

Depreciation expense for Year 1 and Year 2: ($48,000 Cost − $8,000 Salvage) ÷ 4 Year life = $10,000

Year	Depreciation Expense	Accumulated Depreciation
1	$10,000	$10,000
2	$10,000	$20,000

Book value before improvement = $48,000 Cost − $20,000 Accumulated depreciation = $28,000

Book value after improvement = $58,000 Cost − $20,000 Accumulated depreciation = $38,000

Depreciation expense for Year 3 = (Book value − Salvage value) ÷ Remaining useful life

Depreciation expense for Year 3 = ($38,000 − $8,000) ÷ 2 = $15,000

Year 3 Balance in accumulated depreciation = Beginning balance January 1, Year 3 + Year 3 Depreciation expense

Year 3 Balance in accumulated depreciation = $20,000 + $15,000 = $35,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the following balances:

Truck 48,000

Accumulated Depreciation 20,000

Also, on January 1, Year 3 the company paid $10,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Based on this information, the balance in the accumulated depreciation shown on the Year 3 balance sheet is:

Multiple Choice

• $28,000.

• $15,000.

• $20,000.

• $35,000.

$6,000.

Explanation

Depreciation expense for Year 1 and Year 2: ($48,000 Cost − $8,000 Salvage) ÷ 4 Year live = $10,000

Year	Depreciation Expense	Accumulated Depreciation
1	$10,000	$10,000
2	$10,000	$20,000

Book value before improvement = $48,000 Cost − $20,000 Accumulated Depreciation = $28,000

Book value after improvement = $48,000 Cost − $10,000 Accumulated Depreciation* = $38,000

^*footnote asteriskThe $10,000 investment to extend the useful life has been deducted from the accumulated depreciation account balance.

Depreciation expense for Year 3 = (Book value − Salvage value) ÷ Remaining useful life

Depreciation expense for Year 3 = ($38,000 Book value − $8,000 Salvage value) ÷ 5 years = $6,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the following account balances:

Truck 48,000

Accumulated Depreciation (20,000)

Also, on January 1, Year 3 the company paid $10,000 to replace an engine that extended the useful life of the asset from a total of four years to a total of seven years. Based on this information, the amount of depreciation expense shown on the Year 3 income statement is:

Multiple Choice

• $9,200.

• $6,000.

• $5,200.

• $2,000.

Account Titles	Debit	Credit
Truck	10,000
Cash		10,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the balances shown in the following financial statements model. The letters “NA” indicate that the component of the equation is “Not Affected”.

Balance Sheet									Income Statement					Cash Flows Statement
Assets					=	Liabilities	+	Equity
Cash	+	Truck	−	Accumulated Depreciation					Revenue	-	Expenses	=	Net Income
25,000	+	48,000	−	20,000	=	NA	+	53,000	NA	-	NA	=	NA	NA

Also, on January 1, Year 3 the company paid $10,000 to replace the engine to make the truck better by enabling it to operate using less expensive natural gas. Which of the following shows the journal entry that would be necessary to replace the engine on January 1, Year 3?

Multiple Choice

Account Titles	Debit	Credit
Truck	10,000
Cash		10,000

Correct

Account Titles	Debit	Credit
Accumulated Depreciation	10,000
Cash		10,000

Account Titles	Debit	Credit
Depreciation Expense	10,000
Cash		10,000

Account Titles	Debit	Credit
Accumulated Depreciation	10,000
Truck		10,000

$6,000.

Explanation

Depreciation expense for Year 1 and Year 2: ($48,000 Cost − $8,000 Salvage) ÷ 4 Year life = $10,000

Year	Depreciation Expense	Accumulated Depreciation
1	$ 10,000	$ 10,000
2	$ 10,000	$ 20,000

Book value before improvement = $48,000 Cost − $20,000 Accumulated Depreciation = $28,000

Book value after improvement = $48,000 Cost − $10,000 Accumulated Depreciation* = $38,000

^*footnote asteriskThe $10,000 investment to extend the useful life has been deducted from the accumulated depreciation account balance.

Depreciation expense for Year 3 = (Book value − Salvage value) ÷ Remaining useful life

Depreciation expense for Year 3 = ($38,000 Book value − $8,000 Salvage value) ÷ 5 years = $6,000

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the following account balances:

Truck 48,000

Accumulated Depreciation 20,000

Also, on January 1, Year 3 the company paid $10,000 to replace an engine that extended the useful life of the asset from a total of four years to a total of seven years. Based on this information, the amount of depreciation expense shown on the Year 3 income statement is:

Multiple Choice

• $9,200.

• $2,000.

• $6,000.

• $5,200.