Multiple Choice
What will be the book value of the asset after two years?
3. Accrual Accounting Concepts
Adjusting Entries: Depreciation
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On January 1, Super Car Wash purchases a brand new auto-washing machine on account for $40,000. The company expects the machine to last eight years. The company chose the 'straight-line' method to depreciate the asset, expecting no salvage value. The adjusting entry at the end of the first year would include:
A
Debit Depreciation Expense $5,000; Credit Accumulated Depreciation $5,000
B
Debit Accumulated Depreciation $5,000; Credit Depreciation Expense $5,000
C
Debit Depreciation Expense $40,000; Credit Accumulated Depreciation $40,000
D
Debit Accumulated Depreciation $40,000; Credit Depreciation Expense $40,000
Verified step by step guidance1
Identify the cost of the asset, which is $40,000, and note that the asset has no salvage value and a useful life of 8 years.
Understand that the straight-line method of depreciation spreads the cost of the asset evenly over its useful life.
Calculate the annual depreciation expense using the formula: \( \text{Annual Depreciation Expense} = \frac{\text{Cost of the Asset} - \text{Salvage Value}}{\text{Useful Life}} \).
Substitute the given values into the formula: \( \text{Annual Depreciation Expense} = \frac{40,000 - 0}{8} \).
Prepare the adjusting journal entry at the end of the first year by debiting Depreciation Expense and crediting Accumulated Depreciation with the calculated annual depreciation expense.
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