Financial Accounting Quiz: Depreciation Adjusting Entries
20 questions · exam conditions
0:00
Depreciation Adjusting EntriesQuestion 1 of 20

On Jan 1, Year 1, a company bought equipment for $400,000 with a 10-year life and no salvage value, using straight-line depreciation. On Dec 31, Year 3, after recording depreciation, the asset is tested for impairment. Its recoverable amount is determined to be $260,000. What is the depreciation expense that the company should record for Year 4?

$40,000
$37,143
$26,000
$20,000
← Back to quizzes

Financial Accounting Quiz

Financial Accounting Quiz: Depreciation Adjusting Entries

Practice Depreciation Adjusting Entries in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Depreciation Adjusting Entries, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

On Jan 1, Year 1, a company bought equipment for $400,000 with a 10-year life and no salvage value, using straight-line depreciation. On Dec 31, Year 3, after recording depreciation, the asset is tested for impairment. Its recoverable amount is determined to be $260,000. What is the depreciation expense that the company should record for Year 4?

  1. $40,000
  2. $37,143 (correct answer)
  3. $26,000
  4. $20,000
Explanation:
  1. Calculate book value before impairment: Annual depr = $400k/10 = $40k. After 3 years, AD = $120k, Book Value = $280k.
  2. Recognize impairment: An impairment loss of $280k (Book Value) - $260k (Recoverable Amount) = $20k is recorded. The new book value is $260k.
  3. Calculate future depreciation: This new book value of $260k is depreciated over the remaining useful life of 7 years (10 - 3).
  4. New annual depreciation = $260,000 / 7 years = $37,143.

Question 2

A company uses the composite method to depreciate a group of assets purchased for $450,000. The composite life is 8 years. Two years after purchase, one asset from the group, which had an original allocated cost of $100,000, is sold for $70,000 cash. What is the result of this disposal?

  1. A loss on disposal of $5,000 is recognized.
  2. A gain on disposal of $70,000 is recognized.
  3. No gain or loss is recognized; Accumulated Depreciation is debited for $25,000.
  4. No gain or loss is recognized; Accumulated Depreciation is debited for $30,000. (correct answer)
Explanation: Under the composite (or group) depreciation method, no gain or loss is recognized on the disposal of an individual asset. The asset is removed from the books at its cost, and the difference between the cash received and the asset's cost is debited (if cash < cost) or credited (if cash > cost) to Accumulated Depreciation. Here, Cash is debited for $70,000, the asset account is credited for $100,000, and Accumulated Depreciation is debited for the $30,000 difference.

Question 3

On January 1, Year 1, a company purchased equipment for $120,000 with an estimated useful life of 10 years and a salvage value of $10,000. The company uses straight-line depreciation. At the start of Year 4, the company revised the total useful life to 12 years and the salvage value to $5,000. What is the depreciation expense that should be recorded for Year 4?

  1. $9,111 (correct answer)
  2. $9,583
  3. $11,714
  4. $11,000
Explanation: This is a change in accounting estimate, accounted for prospectively.
  1. Calculate book value at the beginning of Year 4. Original annual depreciation = ($120,000 - $10,000) / 10 = $11,000. Accumulated depreciation after 3 years = $11,000 * 3 = $33,000. Book value = $120,000 - $33,000 = $87,000.
  2. Calculate the new annual depreciation. New depreciable base = Book value - New salvage value = $87,000 - $5,000 = $82,000. Remaining useful life = New total life - Years passed = 12 - 3 = 9 years. New annual depreciation = $82,000 / 9 = $9,111.

Question 4

On January 1, a company purchased a building for 2,000,000.Forcomponentdepreciationpurposes,thebuilding′scostwasallocatedasfollows:Structure(2,000,000. For component depreciation purposes, the building's cost was allocated as follows: Structure (1,200,000 cost, 40-year life), Roof (300,000cost,20−yearlife),andHVACsystem(300,000 cost, 20-year life), and HVAC system (500,000 cost, 15-year life). All components have no salvage value and are depreciated using the straight-line method. What is the total depreciation expense for the first year?

  1. $50,000
  2. $65,040
  3. $80,000
  4. $78,333 (correct answer)
Explanation: Component depreciation requires calculating depreciation for each component separately and then summing them. \n- Structure: $1,200,000 / 40 years = $30,000. \n- Roof: $300,000 / 20 years = $15,000. \n- HVAC: $500,000 / 15 years = $33,333. \n- Total Depreciation Expense = $30,000 + $15,000 + $33,333 = $78,333.

Question 5

A company acquired an asset on January 1 for $500,000. It has a 5-year useful life and a $50,000 salvage value. At the end of the second year, the asset's reported book value is $230,000. Which depreciation method is the company using?

  1. Straight-line
  2. Double-declining balance
  3. Sum-of-the-years'-digits (correct answer)
  4. Units-of-production
Explanation: Total depreciation recorded over two years is Cost - Book Value = $500,000 - $230,000 = 270,000.\nLet′stestthemethods:\n∗Straight−line:(270,000. \nLet's test the methods:\n*Straight-line: (500k - $50k) / 5 = $90k/year. Two years = $180k. Incorrect.\n*Double-declining balance: Rate = (1/5)2 = 40%. Y1 Depr = $500k40% = 200k.Y2Depr=(200k. Y2 Depr = (500k-$200k)40% = $120k. Total = $320k. Incorrect.\nSum-of-the-years'-digits: SYD = 5+4+3+2+1=15. Depreciable base = $450k. Y1 Depr = $450k * (5/15) = $150k. Y2 Depr = $450k * (4/15) = $120k. Total = $270k. This matches the required accumulated depreciation.

Question 6

A company has total assets of $1,000,000 and total liabilities of $400,000 before its year-end adjustments. The company then records its annual depreciation adjusting entry of $50,000. What is the company's debt-to-assets ratio immediately after this adjusting entry is posted?

  1. 40.0%
  2. 42.1% (correct answer)
  3. 44.4%
  4. 38.1%
Explanation: The depreciation adjusting entry (Debit Depreciation Expense, Credit Accumulated Depreciation) has two effects on the balance sheet:
  1. Accumulated Depreciation, a contra-asset, increases by $50,000. This reduces total assets to $1,000,000 - $50,000 = $950,000.
  2. Depreciation Expense reduces net income, which closes to retained earnings. This reduces total equity by $50,000. Liabilities are unaffected. \nNew Debt-to-Assets Ratio = Total Liabilities / New Total Assets = $400,000 / $950,000 = 0.421 or 42.1%.

Question 7

At the start of Year 1, a company purchased a machine for $80,000 with a 4-year life and no salvage value, to be depreciated using the double-declining balance method. However, the accountant mistakenly recorded straight-line depreciation for Year 1 and Year 2. The error was discovered at the beginning of Year 3. What is the correct amount of depreciation expense to be recorded for Year 3?

  1. $20,000
  2. $15,000
  3. $10,000 (correct answer)
  4. $5,000
Explanation: Depreciation for Year 3 should be based on the correct book value at the beginning of Year 3, as if the correct method had been used all along.
  1. Calculate correct DDB depreciation. Rate = (1/4)*2 = 50%.
  2. Year 1 correct depr = $80,000 * 50% = $40,000.
  3. Book value at start of Y2 = $80,000 - $40,000 = $40,000.
  4. Year 2 correct depr = $40,000 * 50% = $20,000.
  5. Correct book value at start of Y3 = $40,000 - $20,000 = $20,000.
  6. Year 3 correct depr = $20,000 * 50% = $10,000.

Question 8

A company owns a machine purchased 12 years ago for $250,000. It was depreciated using the straight-line method over a 10-year useful life with a $10,000 salvage value. The machine is still being used at the end of Year 12. Which statement correctly describes the accounting for this machine on the December 31, Year 12 balance sheet?

  1. The asset's book value is zero because it is fully depreciated.
  2. The asset is removed from the balance sheet as its useful life has expired.
  3. Negative depreciation is recorded to increase the asset's value to its estimated fair value.
  4. The asset is reported at a book value of $10,000. (correct answer)
Explanation: An asset is depreciated down to its salvage value. After 10 years, the accumulated depreciation is ($250,000 - $10,000) = 240,000.ThebookvalueisCost(240,000. The book value is Cost (250,000) - AD ($240,000) = $10,000. As long as the asset is still in use, it remains on the balance sheet at this book value (its salvage value). No further depreciation is recorded in Years 11 and 12.

Question 9

A firm exchanges an old truck for a new truck in a transaction with commercial substance. The old truck has a book value of $15,000 (cost $60,000; accumulated depreciation $45,000) and a fair value of $12,000. The firm also pays $55,000 cash. The new truck will be depreciated over 5 years using the straight-line method with no salvage value. What is the depreciation expense for the first full year of the new truck's life?

  1. $14,000
  2. $13,400 (correct answer)
  3. $11,000
  4. $2,400
Explanation: For a non-monetary exchange with commercial substance, the new asset is recorded at the fair value of the asset(s) given up. \n1. Determine the cost of the new truck: Fair value of old truck (12,000)+Cashpaid(12,000) + Cash paid (55,000) = 67,000.\n2.Calculatetheannualdepreciation:(67,000. \n2. Calculate the annual depreciation: (67,000 Cost - $0 Salvage Value) / 5 years = 13,400.Thedistractorusingbookvalue(13,400. The distractor using book value (15,000 + $55,000 = $70,000 cost basis) is the treatment for exchanges lacking commercial substance.

Question 10

An asset costing $100,000 with a 10-year life and $10,000 salvage value is depreciated using the straight-line method. The asset was purchased on January 1, Year 1, and sold on June 30, Year 4. The adjusting entry to update depreciation immediately prior to the sale would include which of the following?

  1. A debit to Depreciation Expense for $9,000.
  2. A debit to Accumulated Depreciation for $31,500.
  3. A credit to Accumulated Depreciation for $4,500. (correct answer)
  4. A credit to Cash for the amount of depreciation.
Explanation: The adjusting entry must update depreciation for the portion of the current year the asset was in service.
  1. Calculate annual depreciation: ($100,000 - $10,000) / 10 years = $9,000 per year.
  2. Calculate depreciation for the partial period in Year 4 (January 1 to June 30): $9,000 * (6/12) = $4,500.
  3. The adjusting journal entry is a debit to Depreciation Expense for $4,500 and a credit to Accumulated Depreciation for $4,500.

Question 11

At the beginning of a new fiscal year, an accountant may choose to reverse certain adjusting entries made at the end of the prior year to simplify bookkeeping. Which of the following year-end adjusting entries is typically not reversed?

  1. An entry to record accrued salaries payable.
  2. An entry to record depreciation expense. (correct answer)
  3. An entry to record accrued interest revenue.
  4. An entry to record unearned revenue when cash was initially credited to a revenue account.
Explanation: Adjusting entries for accruals (e.g., accrued expenses, accrued revenues) are commonly reversed. Adjusting entries for some deferrals are also reversed. However, adjusting entries involving accounting estimates, such as depreciation expense or bad debt expense, are not reversed. These entries reflect the consumption of an asset or the estimation of a period's expense, and reversing them would be conceptually incorrect.

Question 12

A company purchases equipment on November 1, Year 1, for $150,000. The equipment has a 7-year useful life and a $10,000 salvage value. The company uses the straight-line method and applies the half-year convention for all fixed assets. What is the book value of the equipment at the end of Year 2?

  1. $120,000 (correct answer)
  2. $126,667
  3. $130,000
  4. $140,000
Explanation:
  1. Calculate full-year straight-line depreciation: ($150,000 - $10,000) / 7 = $20,000.
  2. Calculate Year 1 depreciation using the half-year convention: $20,000 * 0.5 = $10,000.
  3. Calculate Year 2 depreciation (a full year's amount): $20,000.
  4. Total accumulated depreciation at end of Year 2 = $10,000 (Y1) + $20,000 (Y2) = $30,000.
  5. Book value at end of Year 2 = $150,000 Cost - $30,000 AD = $120,000.

Question 13

A company's records show the following balances for its equipment accounts:\n- January 1: Equipment (cost) $800,000; Accumulated Depreciation $300,000.\n- December 31: Equipment (cost) $950,000; Accumulated Depreciation $380,000.\nDuring the year, the company sold equipment that had an original cost of $50,000 and accumulated depreciation of $35,000. What was the company's depreciation expense for the year?

  1. $80,000
  2. $45,000
  3. $130,000
  4. $115,000 (correct answer)
Explanation: Use a T-account to analyze the Accumulated Depreciation account. The formula is: Beginning AD + Depreciation Expense - AD of Asset Sold = Ending AD. \n$300,000 + Depreciation Expense - $35,000 = 380,000.\n380,000. \n265,000 + Depreciation Expense = $380,000. \nDepreciation Expense = $380,000 - $265,000 = $115,000.

Question 14

A company purchased a machine for $65,000 on April 1, Year 1. The machine has an estimated useful life of 8 years and a salvage value of $5,000. The company uses the double-declining balance method for depreciation. What is the balance in the Accumulated Depreciation account at the end of Year 2?

  1. $13,125
  2. $13,203
  3. $25,391 (correct answer)
  4. $28,438
Explanation:
  1. Calculate the DDB rate: Straight-line rate = 1/8 = 12.5%. DDB rate = 12.5% * 2 = 25%.
  2. Calculate Year 1 depreciation (partial year): $65,000 * 25% * (9/12) = $12,187.50.
  3. Calculate Year 2 depreciation: Book value at start of Year 2 = $65,000 - $12,187.50 = $52,812.50. Year 2 depreciation = $52,812.50 * 25% = $13,203.13.
  4. Calculate Accumulated Depreciation at end of Year 2: $12,187.50 (Year 1) + $13,203.13 (Year 2) = $25,390.63, which rounds to $25,391.

Question 15

A company purchased a machine for $320,000 with an estimated salvage value of $20,000 and an expected production of 500,000 units over its life. The company uses the units-of-production method. In Year 1, 60,000 units were produced. In Year 2, 80,000 units were produced. What is the book value of the machine at the end of Year 2?

  1. $84,000
  2. $236,000 (correct answer)
  3. $260,000
  4. $272,000
Explanation:
  1. Calculate the depreciation rate per unit: ($320,000 Cost - $20,000 Salvage Value) / 500,000 units = $0.60 per unit.
  2. Calculate total accumulated depreciation after 2 years: Total units produced = 60,000 (Y1) + 80,000 (Y2) = 140,000 units. Accumulated Depreciation = 140,000 units * $0.60/unit = $84,000.
  3. Calculate book value: $320,000 Cost - $84,000 Accumulated Depreciation = $236,000.

Question 16

On January 1, Year 1, a firm bought equipment for $90,000 with a 5-year life and no salvage value, using the straight-line method. The bookkeeper erroneously debited the entire $90,000 to Repairs and Maintenance Expense in Year 1 and recorded no depreciation in Year 1 or Year 2. This error was discovered at the end of Year 2, before closing the books. What is the isolated effect of this error on net income for the year ended December 31, Year 2?

  1. Net income is understated by $72,000.
  2. Net income is overstated by $18,000. (correct answer)
  3. Net income is understated by $18,000.
  4. Net income is overstated by $36,000.
Explanation: The question asks for the effect on Year 2 net income only. The correct depreciation expense for Year 2 should have been ($90,000 / 5 years) = $18,000. Since no depreciation expense was recorded in Year 2, expenses for Year 2 are understated by $18,000. Understated expenses lead to an overstatement of net income by $18,000. The error in Year 1 affected Year 1's net income, not Year 2's.

Question 17

An asset is purchased on October 1, Year 1, for $80,000. It has a 4-year life and an $8,000 salvage value. The company's policy is to record depreciation to the nearest full month using the straight-line method. What is the balance of the Accumulated Depreciation account on December 31, Year 2?

  1. $18,000
  2. $21,000
  3. $22,500 (correct answer)
  4. $27,000
Explanation:
  1. Calculate annual depreciation: ($80,000 - $8,000) / 4 years = $18,000.
  2. Calculate Year 1 depreciation: The asset was used for 3 months (Oct, Nov, Dec). Depreciation = $18,000 * (3/12) = $4,500.
  3. Calculate Year 2 depreciation: This is a full year, so depreciation is $18,000.
  4. Total Accumulated Depreciation at end of Year 2 = $4,500 (Y1) + $18,000 (Y2) = $22,500.

Question 18

An asset is purchased for $120,000 and has a 5-year useful life with a salvage value of $30,000. The company uses the double-declining balance method. What is the amount of depreciation expense to be recorded in the third year?

  1. $13,200 (correct answer)
  2. $17,280
  3. $18,000
  4. $28,800
Explanation:
  1. DDB rate = (1/5) * 2 = 40%.
  2. Year 1 depreciation = $120,000 * 40% = $48,000. Book value = $72,000.
  3. Year 2 depreciation = $72,000 * 40% = $28,800. Book value = $43,200.
  4. Potential Year 3 depreciation = $43,200 * 40% = $17,280.
  5. Check the salvage value constraint. An asset cannot be depreciated below its salvage value. If the full $17,280 were taken, the book value would become $43,200 - $17,280 = $25,920, which is below the $30,000 salvage value. Therefore, depreciation in Year 3 is limited to the amount that brings the book value down to the salvage value: $43,200 - $30,000 = $13,200.

Question 19

A company acquired equipment on January 1, Year 1, for $200,000. It is depreciated using the straight-line method over a 10-year life with a $20,000 salvage value. On January 1, Year 5, the company incurred $40,000 for a major overhaul that extended the asset's total useful life to 13 years. What is the adjusting journal entry for depreciation on December 31, Year 5?

  1. A debit to Depreciation Expense for $18,000.
  2. A debit to Depreciation Expense for $12,000.
  3. A debit to Depreciation Expense for $16,444. (correct answer)
  4. A debit to Depreciation Expense for $16,923.
Explanation:
  1. Calculate book value at the date of the overhaul. Original annual depreciation = ($200,000 - $20,000) / 10 = $18,000. AD after 4 years = $18,000 * 4 = $72,000. Book value = $200,000 - $72,000 = $128,000.
  2. Capitalize the overhaul cost. New book value = $128,000 + $40,000 = $168,000.
  3. Calculate new annual depreciation. Remaining life = 13 total years - 4 years passed = 9 years. New depreciable base = $168,000 - $20,000 = $148,000. New annual depreciation = $148,000 / 9 = $16,444. The entry is a debit to Depreciation Expense and a credit to Accumulated Depreciation for this amount.

Question 20

Meridian Corp. owns machinery with an original cost of $450,000 and accumulated depreciation of $180,000 as of December 31, Year 2. The machinery has a remaining useful life of 6 years and no salvage value. On March 31, Year 3, the company spent $75,000 on major improvements that extended the useful life by 2 years. Using straight-line depreciation, what amount should be recorded as depreciation expense for the year ending December 31, Year 3?

  1. $33,750
  2. $41,250 (correct answer)
  3. $45,000
  4. $48,750
Explanation: Book value at Dec 31, Year 2: $450,000 - $180,000 = $270,000. Depreciation for Jan-Mar Year 3: $270,000 ÷ 6 years ÷ 12 months × 3 months = $11,250. After improvement on March 31: New book value = $270,000 - $11,250 + $75,000 = $333,750. New useful life = 5.75 remaining years + 2 years extension = 7.75 years. Depreciation Apr-Dec Year 3: $333,750 ÷ 7.75 years ÷ 12 months × 9 months = $30,000. Total Year 3 depreciation: $11,250 + $30,000 = $41,250. Choice A miscalculates the timing. Choice C ignores the improvement. Choice D incorrectly applies the original depreciation rate.