Answer
When recording depreciation on replacement costs, management might elect to make annual appropriations of retained earnings in contemplation of replacing certain facilities at higher price levels. Such appropriations might help to eliminate misunderstandings as to amounts available for distribution as dividends, higher wages, bonuses, or lower sales prices. The need for these appropriations can be explained by supplementary financial schedules, explanations, and footnotes accompanying the financial statements.
Work Step by Step
It is also good to note that, neither depreciation charges nor appropriations of retained earnings result in the accumulation of funds for asset replacement. Fund accumulation is a result of profitable operations and appropriate funds management.
