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On January 1, a company purchased a truck for $120,000. To pay for the truck, it took out a 5-year loan that was to be repaid in 5 equal principal payments over the 5 years. The truck is estimated to be used for 3 years. Which of the following accurately describes the depreciation expense that the company should record related to the truck?


Correct answer. Depreciation expense is recorded according to the matching principle. The matching principle requires the recording of costs as expenses during the period in which those costs help generate revenue. The company expects to benefit from the truck for 3 years, so it should allocate the $120,000 cost of the truck over those 3 years. As such, the company should record depreciation expense of $40,000 ($120,000/3 years) in each of the 3 years.

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