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Asset Valuation

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1. A manager complained about the amount of depreciation charged on the plant for which she was responsible: "The market value of my plant just continues to increase, yet I am hit with large depreciation charges on my income statement and the value of my plant and equipment on the balance sheet goes down each year. This doesn't seem fair." Comment on this statement, focusing on the relation of asset values on the balance sheet to market values on the assets.

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Solution Summary

This solution discusses the difference between the two concepts of market value and book value for assets used in manufacturing.

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The market value of an asset and the book value of an asset are two completely different concepts that usually only meet when the asset is purchased brand new. The market value is a measure of the amount of money it will take to replace the asset. The concept of depreciation is that some part of the asset will wear out from usage over time. The values of assets on a balance sheet ...

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