Question

Alysha Monet has prepared the following list of statements about depreciation. Identify each statement as true or false.

1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue-producing ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.
8. The balance in accumulated depreciation represents the total cost that has been charged to expense since placing the asset in service.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Three factors affect the computation of depreciation: cost, useful life, and salvage value.

Answer 1

1. False
2. True
3. False
4. False
5. False
6. True
7. False
8. True
9. False
10. True

Explanation:

Explanation in order of the list:

1. Depreciation allocates the cost of an assets over its useful life.
2. By spreading the cost of an asset over the period of usage, Depreciation ensures the revenue earned in a period is matched with the usage of the asset employed in revenue generation.
3. The fair value which is the market value of an asset is determined by external factors and is not related to the usage of the asset. The book value is determined by the historical cost and defined lifetime of the asset.
4. Land is not an asset that can be depreciated as it as an unlimited life span
5. Wear and Tear do apply to Building as such, it has a lifespan which can be reliably ascertained for depreciation purposes.
6. A asset that has been in use over a period of time cannot be compared with a new one.
7. The amount accumulated over an asset is the expense that the company has recognized over its useful life. It is not a cash accumulation.
8. The balance is also used to calculate the Net Book Value of the asset.
9. Only the depreciation expense is reported in the Income statement, the accumulated depreciation is removed from the Asset cost to state its Net Book Value
10. The three needed figures in arriving at the depreciation of any asset under the various calculation methods eg Straight Line, Reducing Balance, Sum of the Year digits etc are The Historical cost, Useful Lifespan and Salvage Value