Accounting Made Simple 19

Question 1

1. What is DEPRECIATION?

Answer 1

When a company buys an asset that will last more than one year, its cost is NOT COUNTED AS AN IMMEDIATE EXPENSE, but spread out over its expected useful life.

Question 2

2. What is the DEPRECIATION METHOD under which the cost of an asset is spread out evenly over the expected life of the asset?

Answer 2

STRAIGHT LINE DEPRECIATION

Question 3

3. Example: Checklist Construciton buys a welder for 5k, and it is expected to last 5 years. What is the entry when the purchase is made?

Answer 3

Equipment……..5k
Cash……………..5k

Question 4

4. How is the welding equipment EXPENSED?

Answer 4

Each year, the following entry is made to record DEPRECIATION EXPENSE for the equipment:

Depreciation Expense…..1k
Accumulated Depreciation…..1k

Question 5

5. What is ACCUMULATED DEPRECIATION?

Answer 5

It is a CONTRA ACCOUNT, specifically a CONTRA ASSET ACCOUNT, used to offset an ASSET ACCOUNT. In this case, ACCUMULATED DEPRECIATION is used to offset EQUIPMENT.

Question 6

6. At any given point, the NET of the DEBIT BALANCE in EQUIPMENT, and the CREDIT BALANCE in ACCUMULATED DEPRECIATION gives us:

Answer 6

the NET EQUIPMENT BALANCE or NET BOOK VALUE.

Question 7

7. After the first year of depreciation for the welding equipment, the NET BOOK VALUE would be:

Answer 7

4k (5k less 1k ACCUMULATED DEPRECIATION)

Question 8

8. Why do we make the CREDIT ENTRIES to ACCUMULATED DEPRECIATION rather than DIRECTLY TO EQUIPMENT?

Answer 8

a. To have a record of how much the asset originally cost.

b. To have a record of how much depreciation has been charged against the asset already.

Question 9

9. After five years, ACCUMULATED DEPRECIATION will have a CREDIT BALANCE of 5k (the original cost of the asset), and the asset will have a NET BOOK VALUE of:

Answer 9

ZERO.
When the asset is disposed of, the following entry is made:

Accumulated Dep…..5k
Equipment…………..5k