For replacement of assets does depreciation generate funds
For replacement of assets does depreciation generate funds?
Expert
Yes, depreciation produces funds for replacement of assets. If depreciation is charged against the asset, an important portion is taken out of the profits each year throughout the existence of the existing assets, and is accumulated and retained devoid of being distributed to the owners as dividend. Therefore at the end of the life of the existing asset, the business will have some funds to put back old asset with the latest one.
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The following information is taken from the financial statements of an entity: 20x6 20x5 Property, plant and equipment $4,100,000 $3,600,000 Accumulated depreciation (1,400,000) (1,050,000) Depreciation expense 650,000 Gain on disposal of PPE 35,000 The asset disposed of had a cost of $400,000
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