Depreciation of Fixed Assets: Nature and Calculations

Depreciation is . . .

• a way of setting aside money to provide for the eventual replacement of fixed assets.

• a way of writing off the cost of fixed assets over their estimated revenue­ generating period.

• the writing off of the cost of fixed assets evenly over their estimated useful economic lives.

• the writing off of the cost of fixed assets over their estimated useful economic lives in ever decreasing amounts.

The purpose of charging depreciation as an expense in the profit and loss account is . . .

• to allocate the cost of acquiring fixed assets over the accounting periods expected to benefit from their use.

• to ensure that funds will be available for the eventual replacement of fixed assets.

• to reduce the figure shown in the balance sheet for fixed assets from the cost of those fixed assets to their estimated market value.

• to comply with the prudence concept.

The depreciation charge shown in the profit and loss account . . .

• is a revenue expense.

• is capital expenditure.

• can be either capital expenditure or a revenue expense, depending on the nature of the fixed asset being depreciated.

• None of the above.

'Obsolescence' means . . .

• the decline in the value of fixed assets as a result of them becoming outdated by technological improvement and invention.

• the decline in the book value of fixed assets as a result of them being depreciated using the straight-line method of depreciation.

• the decline in the book value of fixed assets as a result of them being depreciated using the reducing balance method of depreciation.

• None of the above.

A business which owns all of its fixed assets should normally depreciate . .

• all of its fixed assets.

• all of its fixed assets which are of significant value.

• all of its fixed assets except freehold land.

• all of its fixed assets except land.

If the depreciation on a fixed asset is calculated by reference to the reducing b.alance method . . .

• then, in relation to that particular fixed asset, there will be an equal depreciation charge in the profit and loss account of each year during the life of the asset.

• the depreciation charge in the profit and loss account in respect of that asset will decrease each year over the life of the asset.

• the depreciation charge in the profit and loss account relating to that asset will be greater in the later years of the life of the asset than in the earlier years.

• all other things being equal, net profit will be greater in the earlier years of the 1ife of the asset than in the later years.

The net book value of a fixed asset, other than freehold land, which has not been revalued, is . . .

• the amount it cost to acquire it.

• the amount it would cost to buy it, or a similar asset, now.

• the amount it cost to acquire it less the aggregate (total) depreciation charged on it.

• the amount it cost to acquire it less its estimated scrap value.

A firm bought a machine for £33,000. It expects to use the machine for eleven years and then sell it for £11,000. If the firm calculates depreciation by reference to the straight-line method, the annual depreciation charge, in respect of this machine, will be:

• £1,000

• £2,000

• £2,500

• £3,000

A firm bought a fixed asset for £500,000. The asset has an estimated useful economic life of ten years and an estimated scrap value of £50,000.

If the asset is depreciated at the rate of 20% per annum, using the reducing balance method, the depreciation charge, in relation to this asset alone, in the second year of its life will be:

• £45,000

• £72,000

• £80,000

• £90,000

A firm owns fixed assets which, in total, cost £200,000. Aggregate depreciation on these assets amounts to £80,000. If the firm depreciates its fixed assets at the rate of 20% per annum, using the straight-line method, the depreciation charge in its profit and loss account for the current accounting period is:

• £16,000

• £20,000

• £24,000

• £40,000