Why are land improvements depreciated while the land itself is not?

• A. Land improvements are not physical assets, so they must be depreciated.
• B. Land improvements increase the value of land, so they are expensed immediately.
• C. Land improvements have a limited useful life, whereas land has an indefinite useful life.
• D. Land improvements are considered inventory, while land is a fixed asset.

Answer: (C)

Verified step by step guidance

1. Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It applies to assets that have a limited useful life, meaning they will wear out, become obsolete, or lose value over time.
2. Recognize the nature of land: Land is considered to have an indefinite useful life because it does not wear out or become obsolete. Therefore, it is not subject to depreciation.
3. Identify the characteristics of land improvements: Land improvements, such as parking lots, fences, landscaping, and lighting systems, are enhancements made to the land. These improvements have a limited useful life because they can deteriorate or require replacement over time.
4. Understand the accounting treatment: Since land improvements have a limited useful life, their cost is allocated over their useful life through depreciation. This ensures that the expense is matched with the revenue generated during the periods the improvements are in use.
5. Differentiate between land and land improvements: Land is classified as a fixed asset with an indefinite useful life, while land improvements are also fixed assets but are depreciated due to their limited useful life.