Question

ntercompany profits in inventory and land are realized through the eventual sale to outsiders, whereas depreciable assets are considered realized though consumption. what is realization through consumption? multiple choice by decreasing depreciation expense, we increase income and thus realize the unrealized gain. by increasing depreciation expense, we decrease the cost of the asset to its original cost. by decreasing depreciation expense, we increase cost of goods sold. by increasing the asset, we realize the gain because the asset is worth more than it was originally.

Answer 1

Realization through consumption refers to recognizing the profit or gain of a depreciable asset as it is used over time, which is achieved by increasing the depreciation expense, thereby reducing the asset's book value to its residual value.

Step-by-step explanation:

Realization through consumption in the context of accounting means recognizing profit or gain as an asset is used rather than when it is sold. This typically applies to depreciable assets like equipment, vehicles, and buildings. The profit or gain is realized gradually over the useful life of the asset through the process of depreciation. When firms use depreciation to allocate the cost of an asset over its useful life, it reduces the book value of the asset on the balance sheet and charges a portion of the asset's cost to the income statement as an expense.

Thus, the correct understanding of realization through consumption would be: by increasing depreciation expense, we decrease the cost of the asset to its original cost. This is because as depreciation expense increases, it reduces the net book value of the asset down to its residual value, effectively 'consuming' the intercompany profit embedded in the asset over time.