Question

Tri-City Ironworks Co. reported $65,500,000 for equipment and $33,415,000 for accumulated depreciation—equipment on its balance sheet.

a. Does this mean that the replacement cost of the equipment is $65,500,000?


b. Does this mean that $33,415,000 is set aside in a special fund for the replacement of the equipment?

Answer 1

To answer both parts of your question about Tri-City Ironworks Co.:

a. **Does this mean that the replacement cost of the equipment is $65,500,000?**

No, the reported amount of $65,500,000 for equipment represents the original cost or historical cost of the equipment, not its replacement cost. The replacement cost would depend on current market conditions and the cost of acquiring new or equivalent equipment. The historical cost does not account for factors such as inflation, technological advancements, or depreciation.

b. **Does this mean that $33,415,000 is set aside in a special fund for the replacement of the equipment?**

No, the $33,415,000 for accumulated depreciation—equipment does not indicate that money has been set aside in a fund for replacement. Accumulated depreciation is an accounting measure that reflects the total amount of depreciation expense that has been recognized over time for the equipment. It reduces the book value of the equipment on the balance sheet but does not represent cash that is set aside for future replacement. Instead, it represents the wear and tear or loss of value of the equipment due to usage and age.