On January 1, 2010, Rusu Company purchased an asset that had cost $26,000. The asset had a 6-year useful life and an estimated salvage value of $2,000. Rusu depreciates its assets on the straight-line basis. On January 1, 2014 the company spent $12,000 to improve the quality of the asset. Based on this information the recognition of depreciation expense in 2014 would act to:
A) increase total assets by $7,000.
B) reduce total equity by $7,000.
C) reduce total assets by $12,000.
D) increase total equity by $10,000.

Question

Quizplus · Accepted Answer

The depreciation expense for 2014 would reduce total equity by $7,000 because depreciation is an expense that reduces net income, which in turn reduces retained earnings, a component of equity.

On January 1, 2010, Rusu Company Purchased an Asset That