Understanding Depreciation Methods

What is straight-line depreciation?

• A technique for valuing an asset based on its market price.

• A method of increasing an asset's value over time.

• A way to calculate depreciation based on the asset's revenue generation.

• A method of depreciating an asset evenly over its useful life.

How is straight-line depreciation calculated?

• Depreciation = Cost / Useful Life

• Depreciation = (Cost + Salvage Value) / Useful Life

• Depreciation = (Cost - Useful Life) / Salvage Value

• Depreciation = (Cost - Salvage Value) / Useful Life

What are the advantages of using straight-line depreciation?

• It is the only method accepted by tax authorities.

• Advantages of using straight-line depreciation include simplicity, consistency in expense recognition, and ease of understanding for financial reporting.

• It requires complex calculations for each asset.

• It allows for accelerated tax benefits.

What is the declining balance method of depreciation?

• A linear depreciation method that spreads the cost evenly over the asset's useful life.

• A method that calculates depreciation based on the asset's original cost.

• A method that only applies to intangible assets like patents and trademarks.

• The declining balance method of depreciation is an accelerated depreciation method that applies a constant percentage to the declining book value of an asset.

How is the declining balance method different from straight-line depreciation?

• The declining balance method is used for land, while straight-line is for buildings.

• Both methods result in the same total depreciation over the asset's life.

• The declining balance method results in higher depreciation in early years, while straight-line depreciation is consistent over time.

• Straight-line depreciation allows for accelerated write-offs compared to declining balance.

What formula is used to calculate declining balance depreciation?

• Depreciation Expense = Book Value at Beginning of Period x Depreciation Rate

• Depreciation Expense = Total Cost x Useful Life

• Depreciation Expense = Annual Revenue x Depreciation Rate

• Depreciation Expense = Book Value at End of Period x Depreciation Rate

What is the effect of using a higher depreciation rate in the declining balance method?

• It has no impact on taxable income or expenses.

• It increases the asset's book value over time.

• It reduces overall expenses in the later years.

• It accelerates depreciation, leading to higher expenses in early years and lower taxable income.

How does the useful life of an asset affect straight-line depreciation?

• The useful life inversely affects the annual depreciation expense in straight-line depreciation.

• A longer useful life results in higher total depreciation over time.

• The useful life directly increases the annual depreciation expense.

• The useful life has no impact on the straight-line depreciation method.

What happens to the book value of an asset under the declining balance method?

• The book value of an asset increases over time.

• The book value of an asset remains constant over time.

• The book value of an asset decreases over time.

• The book value of an asset is irrelevant under this method.

Can you provide an example of straight-line depreciation calculation?

• $1,200 per year

• $1,800 per year

• $3,000 per year

• $2,500 per year