Day: November 8, 2019

A business which owns all of its fixed assets should normally depreciate . . .

Select ONE answer:

1. all of its fixed assets.
2. all of its fixed assets which are of significant value.
3. all of its fixed assets except freehold land.
4. all of its fixed assets except land.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Freehold land is not normally depreciated because it has an infinite useful economic life. Sometimes, for example, if freehold land is subject to coastal erosion, it should be depreciated.
2. As per answer A above, but also assets do not have to have a significant value to be depreciated. However, GAAP in general applies only to material (significant) amounts of money.
3. Correct
4. Leasehold land has to be depreciated because the lease (it is the lease, not the land, which has been paid for) has a finite life. Freehold land normally does not have to be depreciated because it has an infinite useful economic life. If a building is leased and improvements are made to it, the cost of those improvements should be depreciated over the remaining term of the lease – because once the lease expires, the improvements have no value to the firm which paid for them.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.