Identify each statement as true or false. If false, indicate how to correct the statement.
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.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual value.
false
1. True
2. True
3. False - The book value of a plant asset may or may not approximate its fair value. To correct the statement, it should be stated that the book value is the cost of the asset less its accumulated depreciation.
4. False - Depreciation applies to buildings and equipment, but not to land. To correct the statement, it should be stated that depreciation applies to two classes of plant assets: buildings and equipment.
5. False - Depreciation does apply to a building because its usefulness and revenue-producing ability generally decline over time. To correct the statement, it should be stated that the usefulness and revenue-producing ability of a building generally decline over time.
6. True
7. False - Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset. To correct the statement, it should be stated that recognizing depreciation on an asset reserves funds for the replacement of the asset in the future.
8. True
9. False - Depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet. To correct the statement, it should be stated that depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet.
10. True
1. True: Depreciation is indeed a process of asset valuation, where the value of an asset is allocated over its useful life.
2. True: Depreciation does provide for the proper matching of expenses with revenues, as it spreads the cost of an asset over the periods in which it helps generate revenue.
3. False: The book value of a plant asset may not necessarily approximate its fair value. The book value is the difference between the cost of the asset and its accumulated depreciation. Fair value, on the other hand, is the price at which the asset could be exchanged between knowledgeable, willing parties.
4. False: Depreciation applies to buildings and equipment, but not to land. Land is not subject to depreciation because its useful life is considered indefinite.
5. False: Depreciation does apply to buildings, as their usefulness and revenue producing ability can decline over time. However, the useful life of a building is typically longer than other assets, so the rate of depreciation may be slower.
6. True: The revenue-producing ability of a depreciable asset will decline due to wear and tear and obsolescence, which is why depreciation is recognized to account for this decline in value over time.
7. False: Recognizing depreciation on an asset does not result in an accumulation of cash for replacement. Depreciation is a non-cash expense that is recorded to reflect the decline in value of the asset over time.
8. True: The balance in accumulated depreciation represents the total cost that has been charged to expense over the life of the asset. It shows the cumulative depreciation recorded on the asset.
9. False: Depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet as a contra-asset account to the associated asset.
10. True: Four factors typically affect the computation of depreciation: the cost of the asset, its useful life, salvage value (the estimated value at the end of its useful life), and residual value (the remaining value after deducting the salvage value). These factors are used in various depreciation methods to determine the amount of depreciation expense.