The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?
A) Net property, plant, and equipment would rise to $126 million, and total assets and stockholders' equity would be adjusted accordingly.
B) Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly.
C) Long-term liabilities would rise to $131 million, and total liabilities and stockholders' equity would be adjusted accordingly.
D) Long-term liabilities would fall to $111 million, and total liabilities and stockholders' equity would be adjusted accordingly.

Question

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?
A) Net property, plant, and equipment would rise to $126 million, and total assets and stockholders' equity would be adjusted accordingly. 
B) Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly. 
C) Long-term liabilities would rise to $131 million, and total liabilities and stockholders' equity would be adjusted accordingly. 
D) Long-term liabilities would fall to $111 million, and total liabilities and stockholders' equity would be adjusted accordingly.

Quizplus · Accepted Answer

Depreciation is the decrease in value of an asset over time. If the company's long-term assets were judged to depreciate at an extra $5 million per year, it means that the net value of the property, plant, and equipment would decrease by $5 million each year. Therefore, after one year, the net value of the property, plant, and equipment would be $120 million ($125 million - $5 million) instead of $125 million. This would result in a decrease in total assets and a decrease in stockholders' equity, as both are directly affected by the value of assets. Therefore, the balance sheet would change, and the new net property, plant, and equipment value would be $116 million ($125 million - $5 million/year x 2 years), resulting in a decrease in total assets and stockholders' equity by $10 million. Therefore, the correct answer is B.

The Above Diagram Shows a Balance Sheet for a Certain