Disc Company purchased equipment at the beginning of 2010 for $200,000. The company decided to depreciate the equipment over an 5-year period using the straight-line method. The company estimated the equipment's salvage value at $20,000. The journal entry to record depreciation expense for 2011 is a debit to:
A) depreciation expense and a credit to accumulated depreciation for $40,000.
B) accumulated depreciation and a credit to equipment for $40,000.
C) depreciation expense and a credit to equipment for $36,000.
D) depreciation expense and a credit to accumulated depreciation for $36,000.

Question

Quizplus · Accepted Answer

The straight-line method calculates depreciation by dividing the depreciable value (cost - salvage value) by the useful life of the asset.

In this case, the depreciable value is $180,000 ($200,000 - $20,000) and the useful life is 5 years. Therefore, the annual depreciation expense is $36,000 ($180,000 / 5).

To record depreciation expense for 2011, we will debit depreciation expense for $36,000 and credit accumulated depreciation for $36,000. This reduces the book value of the equipment by the same amount ($36,000) and is in accordance with generally accepted accounting principles (GAAP).

Option A is incorrect because it records an overstatement of depreciation expense.
Option B is incorrect because it records an overstatement of equipment value.
Option C is incorrect because it records an overstatement of equipment value.

Disc Company Purchased Equipment at the Beginning of 2010 for $200,000