Question

Leahy Company purchased equipment at the beginning of the year for $400,000. The company decided to depreciate the equipment using the straight-line method.

Which of the following is one effect of recognizing depreciation expense during the year?

	A.	Accumulated Depreciation increases and shareholders' equity decreases.
	B.	Shareholders' equity and the Equipment account decrease.
	C.	Accumulated Depreciation increases and the Equipment account decreases.
	D.	Total expenses and the book value of the depreciated equipment increase.

Answer 1

Answer: Option A

Accumulated depreciation increases and shareholders equity decreases.

Because depreciation expenses are transferred to Accumulated depreciation account so it will increase. It also decreases net profit. So the decrease in net profit decreases shareholders equity.

Option B is incorrect because Equipment account will not decrease. It will remain constant in its useful life.

Option C is incorrect because Equipment account will not change.

Option D is also incorrect because book value of Equipment will not increase with the effect of depreciation.

Accumulated depreciation account is transferred to asset account at the time of disposal or sale of equipment.