Question

A company that uses accrual-basis accounting purchased equipment on July 1 of the current year for $20,000. The company expects to use the equipment consistently for four years, and will record ________ depreciation in its December 31 financial statements.

Answer 1

Answer: $2,500

Explanation: Accrual basis of accounting is an accounting technique where revenue and expenses are recorded before payment is made. Revenue is recorded once the transaction is earned even if payment is to be made in the future. Similarly, expenses are recorded before payment is made to the service provider. This is unlike the cash method where transactions are recorded only when payment is made either in terms of revenue or expenses.

Therefore, in the question above.

$20,000 machinery is recorded as expenses

For 4 years, starting from 1st July of current year:

$20,000 ÷ 4 = $5,000 each year(30th June of each year)

31st December = 6 months or half a year

$5,000÷2 = $2,500