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How is the declining value of a fixed asset other than land accounted for?
AThrough the depreciation of its cost
BThrough a write-off of its liabilities
CThrough a discount on its sale price
DThrough a transfer to intangibles
Answer & Solution
Correct answer: A. Through the depreciation of its cost
1. Fixed assets are long-term assets used by the firm for more than a year, such as land, buildings, machinery and equipment.
2. Except for land, they wear out and become outdated, so they decrease in value every year.
3. That declining value is accounted for through depreciation, which allocates the asset's original cost to the years it is expected to produce revenues.
4. Because nobody knows exactly how long an asset will last, estimates are used, based on past experience with similar items or on IRS guidelines.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.4 The Balance Sheet_
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