X Company prepares annual financial statements. On January 1, 2012, it purchased
ID: 2483724 • Letter: X
Question
X Company prepares annual financial statements. On January 1, 2012, it purchased a machine for $76,000. Its estimated useful life was 4 years and its estimated disposal value in 4 years was $5,000. Using straight-line depreciation, what is the adjusting entry on December 31, 2014?
A) Equipment and Retained Earnings both decrease by $17,750
B) Equipment and Retained Earnings both decrease by $19,000
C) Equipment and Paid-In Capital both decrease by $19,000
D) Equipment and Retained Earnings both decrease by $35,500
E) Equipment and Retained Earnings both increase by $35,500
F) Equipment and Paid-In Capital both decrease by $17,750
Explanation / Answer
Compute annual depreciation on the machine using straight-line method as follows:
Annual depreciation = (Cost - Disposal value) / estimated useful life
= (76,000 - 5,000) / 4
= 17,750
The adjusting entry to record depreciation is prepared by debiting depreciation expense and crediting accumulated depreciation.
Depreciation expense will reduce the retained earnings by the amount of dewpreciation and accumulated depreciation will reduce the amount of equipment by the amount of depreciation.
Therefore, Equipment and Retained Earnings both decrease by $17,750.
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