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Splish Brothers Inc. purchased equipment for $18000 on December 1. It is estimated that annual depreciation on the computer will be $3600. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. debit Equipment, $18000; credit Accumulated Depreciation, $18000. b. debit Depreciation Expense, $14400; credit Accumulated Depreciation, $14400. c. debit Depreciation Expense, $3600; credit Accumulated Depreciation, $3600. d. debit Depreciation Expense, $300; credit Accumulated Depreciation, $300.

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Answer:

c. Depreciation Expense (Dr.)                  $3,600

                 Accumulated Depreciation (Cr.)              $3,600

Explanation:

At each year end, we make adjustments for depreciation to systematically allocate the cost of an asset over its useful life. The matching principle requires us to record a portion of an asset as an expense that relates to the revenue generated by that asset. Another purpose of recording depreciation is Taxation. Depreciation is a tax-allowable expense, and hence reduces corporate Income Taxes. We should also reduce the cost of an equipment each year because the asset losses its worth as the time goes on due to wear and tear.

The Journal Entry to record depreciation is:

Depreciation Expense (Dr.)                  $3,600

                 Accumulated Depreciation (Cr.)              $3,600

Depreciation Expense in charged as a Debit to Profit or Loss Statements, hence reduces our Profit and as a result Taxes. Whereas, Accumulated Deprecation is a contra-asset account. It has a credit balance and reduces the cost of asset.

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