Depreciation Adjusting Entry - Truck Purchase and Calculation

Question: On the first day of the financial year, Merv's Boats purchased a truck for $16,000. The truck is to be depreciated by 25% each year and has a zero residual value. At the end of the first year, the adjusting entry to record depreciation on the truck is:

a. DR Depreciation - Truck $4000; CR Truck $4000 b. DR Depreciation - Truck $12000; CR Accumulated depreciation - Truck $12000 c. DR Accumulated depreciation - Truck $4000; CR Depreciation - Truck 4000 d. DR Depreciation - Truck $4000; CR Accumulated depreciation - Truck $4000

Answer: d. DR Depreciation - Truck $4000; CR Accumulated depreciation - Truck $4000

Explanation:

• Depreciation Expense: The annual depreciation expense is calculated as (Cost - Residual Value) * Depreciation Rate. In this case, it's ($16,000 - $0) * 25% = $4,000.
• Depreciation - Truck: This account represents the expense incurred due to the asset's decline in value.
• Accumulated Depreciation - Truck: This contra asset account accumulates the total depreciation recorded on the truck over its useful life. It reduces the book value of the truck on the balance sheet.

The correct adjusting entry debits the depreciation expense and credits the accumulated depreciation account, reflecting the decrease in the asset's value and the corresponding expense incurred.