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# Chapter 8 Priciple of accounting LO8-2/3

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Tangier Company paid cash to purchase a long-term operational asset. The cost of the asset will be expensed (depreciated)
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over the useful life of the asset.

Purchasing a long-term asset is a deferral event. The cost of the purchase is placed in an asset account on the day of purchase. As the asset is used a portion of its cost will be expensed. Accordingly, the expense recognition is spread over the useful life of the asset. Since the company pays the cash before it recognizes the expense, the purchase is a deferral.
\$20,000

Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful lifeDepreciation expense per year = (\$48,000 Cost - \$8,000 Salvage) ÷ 4 Year life = \$10,000

The accumulated depreciation account is a permanent contra asset account. As its name implies, the balance accumulates each year. In this case the after closing (ending) balance in the accumulated depreciation account will be \$10,000 in Year 1, \$20,000 in Year 2, \$30,000 in Year 3, and \$40,000 in Year 4.
On January 1, Year 1, Marino Moving Company paid \$48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an \$8,000 salvage value. If Marino uses the straight-line method, which of the following shows how the adjusting entry to recognize depreciation expense at the end of Year 3 will affect the Company's financial statements?