Which of the following is true regarding depreciation of equipment?

• A. Depreciation allocates the cost of equipment over its useful life.
• B. Depreciation represents the current market value of equipment.
• C. Depreciation increases the book value of equipment each year.
• D. Depreciation is only recorded when equipment is sold.

Answer: (A)

Verified step by step guidance

1. Understand the concept of depreciation: Depreciation is the systematic allocation of the cost of a tangible asset, such as equipment, over its useful life. It reflects the wear and tear, obsolescence, or usage of the asset rather than its current market value.
2. Analyze the first statement: 'Depreciation allocates the cost of equipment over its useful life.' This aligns with the definition of depreciation, as it spreads the cost of the asset over the periods it is expected to generate revenue.
3. Evaluate the second statement: 'Depreciation represents the current market value of equipment.' This is incorrect because depreciation does not measure market value; it is an accounting method to allocate cost over time.
4. Assess the third statement: 'Depreciation increases the book value of equipment each year.' This is incorrect because depreciation reduces the book value of equipment annually, reflecting its usage and aging.
5. Review the fourth statement: 'Depreciation is only recorded when equipment is sold.' This is incorrect because depreciation is recorded periodically (e.g., monthly or annually) during the asset's useful life, not just at the point of sale.