Questions and Answers
Depreciation is a process of asset valuation, not cost allocation.
False
Depreciation provides for the proper matching of expenses and revenues.
True
The book value of a plant asset should approximate its fair value.
False
Depreciation applies to three classes of plant assets: land, buildings, and equipment.
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Depreciation does not apply to a building because its usefulness and revenue-producing ability generally remain intact over time.
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The revenue-producing ability of a depreciable asset will decline due to wear and tear and to obsolescence.
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Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.
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The balance in accumulated depreciation represents the total cost that has been charged to expense since placing the asset in service.
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Depreciation expense and accumulated depreciation are reported on the income statement.
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Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual value.
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Study Notes
Depreciation Overview
- Depreciation is primarily a process of cost allocation rather than asset valuation.
- It ensures proper matching of expenses with revenues, facilitating accurate profit measurement.
Misconceptions about Book Value
- The book value of a plant asset can significantly differ from its fair market value.
- Depreciation applies to land improvements, buildings, and equipment; land itself does not depreciate.
Nature of Plant Assets
- Buildings do depreciate over time, while land’s usefulness generally does not decline.
- The revenue-producing ability of depreciable assets declines due to factors like wear and tear and obsolescence.
Financial Implications of Depreciation
- Recognizing depreciation does not lead to cash accumulation for future asset replacement.
- The balance in accumulated depreciation reflects the total depreciation expense recognized since the asset was put into service.
Reporting of Depreciation
- Depreciation expense is reported on the income statement, highlighting current period expenses.
- Accumulated depreciation is recorded on the balance sheet, representing total depreciation over an asset's life.
Depreciation Calculation Factors
- Key factors affecting depreciation computation include cost, useful life, and salvage value, which is also referred to as residual value.
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Description
Test your knowledge on key concepts in Accounting 291 with these flashcards. This quiz covers important topics including depreciation, plant assets, and their implications in financial management. Enhance your understanding and prepare effectively for your exam!
