Question

The Yohan Corporation depreciated its assets by $125,000 during the year.Determine the effects of such depreciation...

The Yohan Corporation depreciated its assets by $125,000 during the year.Determine the effects of such depreciation on the Corporation.
a. Assets increase by $125,000 and assets decrease by $125,000.
b. Assets decrease by $125,000 and liabilities decrease by $125,000.
c. Assets decrease by $125,000 and stockholders' equity decreases by $125,000.
d. Liabilities increase by $125,000 and stockholders' equity decreases by $125,000.
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Answer #1

Depreciation is an expense item which is charged to the profit and loss. Since this is an expense item, the corresponding amount is also reduced from the book value of asset. Secondly as it is shown as an expense in the profit and loss, it reduces the profitability of the company. As a result of which the net worth is affected which leads to reduction in shareholders equity.

Therefore, it can be seen from the above explanation that, whenever a depreciation is charged, it will result in decreasing the value of asset and also stockholders equity. So the correct answer is c. Assets decrease by $125,000 and stockholders' equity decreases by $125,000.

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