ACC 250 · Chapter 4 Review Name: ______________________

ACC 250 · Introduction to Financial Accounting

Chapter 4 — Review Questions

Nine questions on the cost principle, the matching principle and depreciation,
then two entries for a box of supplies and five years of GPUs to depreciate.

Fall 2026

Cost principle

Q1

A company pays cash for equipment it will use for the next several years. Under the cost principle, which statement is correct?

  1. AThe equipment is recorded as an asset at its acquisition cost.✔
  2. BThe equipment is recorded as an asset at the price it could be sold for today.✘
  3. CThe payment is recorded as an expense in the period the cash is paid.✘
  4. DThe equipment is recorded as an asset, and its value is updated to market value at each year-end.✘
  5. EThe equipment is recorded as an asset at the cash paid less its expected residual value.✘

A. Paying for equipment is not an expense: the company has traded cash for a resource it will use for years, so it is an asset, and the cost principle records it at acquisition cost. Market value (B, D) and residual value (E) play no part in the initial record. The expense comes later, one year at a time, as depreciation.

Matching principle

Q2

Under the matching principle, which question decides the period in which an expense is recognized?

  1. AIn which period was the cash paid?✘
  2. BIn which period was the resource used up to generate revenue?✔
  3. CIn which period was the supplier’s invoice received?✘
  4. DIn which period was the purchase order signed?✘
  5. EIn which period was the resource delivered to the company?✘

B. Every expenditure raises two separate questions: when is the cash paid, and when is the resource used up? Only the second one fixes the expense. Cash can leave before, after or in the same period, and it changes nothing (A). Delivery (E) is when an asset is recognized, not an expense.

Depreciation

Q3

What is depreciation?

  1. AThe decline in the market value of an asset during the year.✘
  2. BThe process of allocating the cost of a long-term tangible asset over its useful life.✔
  3. CThe cash set aside each year to replace an asset when it wears out.✘
  4. DThe cost of repairing and maintaining an asset each year.✘
  5. EThe process of recording an expenditure as an asset rather than an expense.✘

B. Depreciation allocates cost; it does not measure value. The cost paid at purchase is spread over the years the asset is used, so each year carries its share. No cash is set aside (C), and recording an expenditure as an asset (E) is capitalization, the step that comes before depreciation.

Carrying value

Q4

The carrying value (book value) of equipment reported on the balance sheet equals which of the following?

  1. AIts acquisition cost.✘
  2. BIts acquisition cost less accumulated depreciation.✔
  3. CIts acquisition cost less the current year’s depreciation expense.✘
  4. DIts current market value.✘
  5. EIts accumulated depreciation.✘

B. Carrying value is the value of the asset reported on the balance sheet. The asset itself stays at acquisition cost, and everything depreciated so far, accumulated depreciation, is subtracted from it. Subtracting only this year’s expense (C) forgets the earlier years.

Depreciation expense

Q5

Which statement about Depreciation Expense is correct?

  1. AIt is the part of the asset’s cost allocated to the current accounting period.✔
  2. BIt is the total depreciation recorded on the asset since it was acquired.✘
  3. CIt is reported on the balance sheet, right after the asset it relates to.✘
  4. DIt is a cash payment made at the end of each year.✘
  5. EIt is recorded only in the year the asset is purchased.✘

A. Depreciation Expense is this period’s share of the asset’s cost, and like every expense it is reported on the income statement. B and C describe Accumulated Depreciation. No cash moves when depreciation is recorded (D), and the expense repeats in every year of the useful life (E).

Accumulated depreciation

Q6

A machine is in its third year of use. At the end of Year 3, the balance of Accumulated Depreciation equals which of the following?

  1. AThe depreciation expense of Year 3 alone.✘
  2. BThe depreciation expense of Years 1, 2 and 3 added together.✔
  3. CThe carrying value of the machine at the end of Year 3.✘
  4. DThe acquisition cost less the depreciation expense of Year 3.✘
  5. EZero, because the account is reset at the start of each year.✘

B. Accumulated Depreciation is the total depreciation expense recorded against the asset since it was acquired, so it grows by one year’s expense every year and is never reset (E). What is left after subtracting it from cost is the carrying value (C), a different number.

Contra asset account

Q7

Accumulated Depreciation is a contra asset account (xA). Which statement about it is correct?

  1. AIt is increased with a credit and reported on the balance sheet.✔
  2. BIt is increased with a debit, like every other account in the asset section.✘
  3. CIt is increased with a debit and reported on the income statement.✘
  4. DIt is increased with a credit and reported on the income statement.✘
  5. EIt is decreased each year as depreciation is recorded.✘

A. A contra asset is used to reduce the value of an asset, so it sits in the asset section of the balance sheet but works in the opposite direction: it is credited to increase. That is why the depreciation entry credits Accumulated Depreciation (+xA, −A). Each year’s entry makes it bigger, not smaller (E).

Cost principle · acquisition cost

Q8

Cedar Mill Bakery bought a commercial oven. It paid $24,000 for the oven, $1,500 to have it delivered, and $2,500 to have it installed and tested. During the oven’s first month it also paid $600 for the electricity to run it. At what amount is the oven recorded as an asset?

  1. A$24,000✘
  2. B$25,500✘
  3. C$26,500✘
  4. D$28,000✔
  5. E$28,600✘

D. Acquisition cost includes every cost needed to acquire the oven and prepare it for its intended use: $24,000 + $1,500 + $2,500 = $28,000. The $600 of electricity was used up running the oven that month, so it is an expense of that month, not part of the asset.

OPEX vs CAPEX

Q9

Cedar Mill Bakery made the five expenditures below. Which one is an operating expenditure (OPEX), expensed immediately rather than capitalized?

  1. AIt paid $45,000 for a delivery van it will use for the next six years.✘
  2. BIt paid $80,000 to build a second storefront.✘
  3. CIt paid $6,000 for a two-year insurance policy that starts next month.✘
  4. DIt paid $9,000 of wages to its bakers for work done this month.✔
  5. EIt paid $12,000 for display cases it will use for the next ten years.✘

D. This month’s wages were used up generating this month’s revenue, so they are expensed immediately. The other four buy something that will generate revenue in future periods, a van, a building, two years of insurance coverage, display cases, so each is capitalized as an asset and expensed over the periods it serves.

Questions 10–11 · Birch Lane Dental

Set-up

Birch Lane Dental paid $3,000 cash for dental supplies on January 10 and used all of them in February. Write the number of the account that belongs on each line of the entry. Questions 10, 11, 19 and 20 all use the ten accounts below; an account may be used more than once, or not at all.

  1. 1Accounts Payable
  2. 2Accumulated Depreciation
  3. 3Cash
  4. 4Depreciation Expense
  5. 5Equipment
  6. 6Prepaid Insurance
  7. 7Retained Earnings
  8. 8Supplies
  9. 9Supplies Expense
  10. 10Utilities Expense

Q10 · January — Supplies bought

Q10

Birch Lane Dental paid $3,000 cash for dental supplies on January 10 and used all of them during February. Record the January 10 purchase.

Account choices

  1. 1Accounts Payable
  2. 2Accumulated Depreciation
  3. 3Cash
  4. 4Depreciation Expense
  5. 5Equipment
  6. 6Prepaid Insurance
  7. 7Retained Earnings
  8. 8Supplies
  9. 9Supplies Expense
  10. 10Utilities Expense
AccountDebitCredit
8. Supplies (+A)3,000
3. Cash (−A)3,000

8, then 3. In January the supplies are still on the shelf, so nothing has been used up and there is no expense yet. The company traded one asset for another: Supplies goes up and Cash goes down. The cost principle puts the supplies on the books at what was paid, $3,000.

Q11 · February — Supplies used up

Q11

Birch Lane Dental paid $3,000 cash for dental supplies on January 10 and used all of them during February. Record the entry required at the end of February.

Account choices

  1. 1Accounts Payable
  2. 2Accumulated Depreciation
  3. 3Cash
  4. 4Depreciation Expense
  5. 5Equipment
  6. 6Prepaid Insurance
  7. 7Retained Earnings
  8. 8Supplies
  9. 9Supplies Expense
  10. 10Utilities Expense
AccountDebitCredit
9. Supplies Expense (+E, −SHE)3,000
8. Supplies (−A)3,000

9, then 8. February is when the supplies were used up, so February carries the $3,000 expense. Supplies Expense is debited and the asset Supplies is credited down to zero. No cash moves in February; it left in January, and that is not what the expense follows.

The point The expense belongs to the month the supplies were used up, not the month the cash was paid.

Q12–Q18 · Quartz Analytics buys GPUs

Q12–Q18

On January 1, Year 1, Quartz Analytics, Inc. paid NVIDIA $10,000,000 cash for GPUs it will use for five years, with no residual value. Depreciation is distributed equally over the five years, and financial statements are prepared each December 31. Fill in each amount as a whole number of millions.

  1. Q12The acquisition cost of the GPUs recorded on January 1, Year 1.$10,000,000
  2. Q13Depreciation Expense for Year 1.$2,000,000
  3. Q14Depreciation Expense for Year 2.$2,000,000
  4. Q15Accumulated Depreciation at the end of Year 1.$2,000,000
  5. Q16Accumulated Depreciation at the end of Year 2.$4,000,000
  6. Q17The carrying value (book value) of the GPUs at the end of Year 1.$8,000,000
  7. Q18The carrying value (book value) of the GPUs at the end of Year 2.$6,000,000

10, 2, 2, 2, 4, 8, 6. The GPUs go on the books at the $10M paid. Each year takes an equal $2M slice as Depreciation Expense; Accumulated Depreciation adds the slices up ($2M, then $4M); carrying value is what is left ($10M − $2M = $8M, then $10M − $4M = $6M).

Q19 · December 31, Year 1 — Depreciation

Q19

Quartz Analytics bought the GPUs for $10,000,000 on January 1, Year 1; they have a five-year life, no residual value, and depreciation is distributed equally. Record the depreciation for Year 1 on December 31, Year 1.

Account choices

  1. 1Accounts Payable
  2. 2Accumulated Depreciation
  3. 3Cash
  4. 4Depreciation Expense
  5. 5Equipment
  6. 6Prepaid Insurance
  7. 7Retained Earnings
  8. 8Supplies
  9. 9Supplies Expense
  10. 10Utilities Expense
AccountDebitCredit
4. Depreciation Expense (+E, −SHE)2,000,000
2. Accumulated Depreciation (+xA, −A)2,000,000

4, then 2. One year of the GPUs has been used up, so Year 1 carries $2M of Depreciation Expense. The credit goes to Accumulated Depreciation, not to Equipment: the GPUs stay on the books at their $10M cost, and the contra asset beside them records how much of it has been used. No cash moves; it all left on January 1.

Q20 · December 31, Year 2 — Depreciation

Q20

Quartz Analytics bought the GPUs for $10,000,000 on January 1, Year 1; they have a five-year life, no residual value, and depreciation is distributed equally. Record the depreciation for Year 2 on December 31, Year 2.

Account choices

  1. 1Accounts Payable
  2. 2Accumulated Depreciation
  3. 3Cash
  4. 4Depreciation Expense
  5. 5Equipment
  6. 6Prepaid Insurance
  7. 7Retained Earnings
  8. 8Supplies
  9. 9Supplies Expense
  10. 10Utilities Expense
AccountDebitCredit
4. Depreciation Expense (+E, −SHE)2,000,000
2. Accumulated Depreciation (+xA, −A)2,000,000

4, then 2. The same entry as Year 1, for the same $2M: the slice is equal every year. What changes is the balance it lands in. Accumulated Depreciation now holds $4M, so the carrying value is $10M − $4M = $6M, while Equipment itself has not moved.

The point Depreciation Expense is one year’s slice of the cost. Accumulated Depreciation is every slice so far. Carrying value is what is left.

An asset is recorded at its acquisition cost: everything paid to acquire it and prepare it for its intended use.
An expense is recognized in the period the resource is used up, whatever the cash does.
Depreciation Expense is one year’s share of the cost; Accumulated Depreciation is every year’s share so far; carrying value is cost less accumulated depreciation.

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