Question

A car is purchased for cash of $12,000 on November 1st, 1988. The car has a five-year estimated life with no salvage value. Based on this:

X: Net income decreases by $400 at year end
Y: The account for the long-term asset decreases by $400 at year end
A. X
B. Y
C. Both
D. Neither

Answer 1

Neither statement X nor Y is correct because annual depreciation on the car is $2,400, which reduces both the book value of the asset and the net income by this amount, not $400.

Step-by-step explanation:

The question relates to accounting and the concept of depreciation of assets over their useful life. Given that the car is purchased for $12,000 with no salvage value and a five-year estimated life, depreciation per year would be calculated as the cost divided by the estimated life. This gives us $12,000 / 5 years = $2,400 depreciation per year. Since this is an annual depreciation figure, at the end of the first year, the book value of the car would decrease by $2,400, which means statement Y is incorrect. As for statement X, the net income is affected by the depreciation expense. Therefore, net income would decrease by $2,400 at year end, not $400. This means that statement X is incorrect as well. Hence, the correct answer is D, Neither.