The Ruth Corp. has a machine that it bought January 1, 2016, for $10,000. The machine is used in making the company's products. It expects the machine to last five years in total, and then to have zero value at the end of five years (December 31, 2020) What adjustment, if any, is needed in 2016 with regard to this machine?
A) No adjustment is needed
B) An increase in accumulated depreciation of $2,000, and a reduction in equity of $2,000 (there would be $2,000 of depreciation expense.)
C) A reduction in total assets of $10,000, and a reduction in equity of $10,000 (there would be $10,000 of depreciation expense.)
D) A reduction in cash of $2,000, and a reduction in equity of $2,000 (there would be $2,000 of depreciation expense.)

Question

Quizplus · Accepted Answer

The adjustment needed in 2016 is to record depreciation expense for the year. Since the machine is expected to last five years, the annual depreciation expense would be $2,000 ($10,000/5). This would result in an increase in accumulated depreciation (a contra asset account) of $2,000, and a reduction in equity (retained earnings) of $2,000. No reduction in total assets or cash is necessary.