LO8-2 Calculate straight-line depreciation and show how it affects financial statements.

over the useful life of the asset.

Tangier Company paid cash to purchase a long-term operational asset. The cost of the asset will be expensed (depreciated):

Multiple Choice

• on the day it is purchased.

• at the end of its useful life.

• over the useful life of the asset.

• when the asset is sold.

$10,000.

Explanation

Depreciation expense per year = (Cost of the asset − Salvage value) ÷ Useful life

Depreciation expense per year = ($48,000 Cost − $8,000 Salvage) ÷ 4 Years = $10,000

Straight-line depreciation recognizes the same amount of expense for each year of useful life. In this case, $10,000 will be recognized in Year 1, Year 2, Year 3, and Year 4. The depreciation expense account is a temporary account that is closed at the end of each accounting period. Therefore, the depreciation expense account for the truck has a zero balance at the beginning of each accounting period and a before-closing balance that is equal to one year’s depreciation ($10,000) at the end of each accounting period.

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. If Marino uses the straight-line method, the amount of depreciation expense recognized on the Year 2 income statement is:

Multiple Choice

• $24,000.

• $10,000.

• $20,000.

• $12,000.

$20,000.

Explanation

Depreciation expense per year = (Cost of the asset − Salvage value) ÷ Useful life

Depreciation expense per year = ($48,000 Cost − $8,000 Salvage) ÷ 4 Years = $10,000

The accumulated depreciation account is a permanent contra asset account. As its name implies, the balance accumulates each year. In this case, the after-closing (ending) balance in the accumulated depreciation account will be $10,000 in Year 1, $20,000 in Year 2, $30,000 in Year 3, and $40,000 in Year 4.

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. If Marino uses the straight-line method, the amount of accumulated depreciation shown on the Year 2 balance sheet is:

Multiple Choice

• $10,000.

• $20,000.

• $12,000.

• $24,000.

$28,000.

Explanation

Depreciation expense per year = (Cost of the asset − Salvage value) ÷ Useful life

Depreciation expense per year = ($48,000 Cost − $8,000 Salvage) ÷ 4 Years = $10,000

The book value is the amount of the cost of the asset minus the accumulated depreciation. At the end of Year 2, the book value is $28,000 ($48,000 Cost − $20,000 Accumulated depreciation).

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. If Marino uses the straight-line method, the amount of book value shown on the Year 2 balance sheet is:

Multiple Choice

• $28,000.

• $38,000.

• $30,000.

• $20,000.

Option D

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. If Marino uses the straight-line method, which of the following shows how the adjusting entry to recognize depreciation expense at the end of Year 3 will affect the company’s financial statements? The letters “NA” and “OA” indicate that the component of the equation is “Not Affected” and “Operating Activities” respectively.

	Balance Sheet									Income Statement					Cash Flow Statement
	Assets					=	Liabilities	+	Equity
	Cash	+	Truck	−	Accumulated Depreciation					Revenue	−	Expenses	=	Net Income
A.	NA	+	NA	−	$ 30,000	=	NA	+	$ 30,000	NA	−	$ 30,000	=	$ (30,000)	NA
B.	NA	+	NA	−	$ 30,000	=	NA	+	$ 10,000	NA	−	$ 10,000	=	$ (10,000)	NA
C.	NA	+	NA	−	$ 10,000	=	NA	+	$ 10,000	NA	−	$ 10,000	=	$ (10,000)	$ (10,000) OA
D.	NA	+	NA	−	$ 10,000	=	NA	+	$ (10,000)	NA	−	$ 10,000	=	$ (10,000)	NA

Multiple Choice

• Option A

• Option B

• Option C

• Option D

Account Titles	Debit	Credit
Depreciation Expense	10,000
Accumulated Depreciation		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. If Marino uses the straight-line method, which of the following shows the adjusting entry to recognize depreciation expense at the end of Year 2?

Multiple Choice

Account Titles	Debit	Credit
Accumulated Depreciation	20,000
Depreciation Expense		20,000

Account Titles	Debit	Credit
Depreciation Expense	20,000
Accumulated Depreciation		20,000

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

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