Depreciation of Asset Part One

What is depreciation?

• • A method of increasing the value of an asset

• • A continuous and permanent fall in the economic service potential of an asset

• • The process of assessing and selling an asset

• • A method to increase taxable profit

Which of the following is NOT a cause of depreciation?

• • Wear and tear

• • Passage of time

• • Decreased demand for the asset

• • Obsolescence

Depreciation is used to spread out the cost of an asset over its

• • Market value

• • Estimated useful life

• • Original purchase price

• • Replacement cost

Which of the following is a feature of depreciable assets?

• • Intended for sale in the ordinary course of business

• • Unlimited useful economic life

• • Used to provide goods and services for an enterprise

• • Last less than one year

One of the reasons for calculating depreciation is to:

• • Overstate the value of assets on the balance sheet

• • Reduce the taxable profit

• • Decrease the cost of the asset

• • Prevent the sale of assets

Which of the following is a physical factor causing depreciation?

• • Obsolescence

• • Wear and tear

• • Inadequacy

• • Tax policy changes

Depreciable assets typically:

• • Last for less than one year

• • Have an unlimited useful economic life

• • Are intended for resale

• • Have a limited useful economic life

Which of the following is a reason for recording depreciation?

• • To inflate the value of assets in financial statements

• • To ensure the cost of an asset is spread over its estimated life

• • To increase the profit of the business

• • To avoid replacement of assets

The term "obsolescence" in the context of depreciation refers to:

• • The asset's ability to last longer than expected

• • The asset becoming outdated or no longer useful

• • The physical deterioration of the asset

• • The increase in the asset's value over time

Why is depreciation important for determining the true profit of a business?

• • It inflates the actual profit by reducing expenses

• • It ensures that the cost of an asset is matched with the revenue it generates over time

• • It allows the business to avoid paying taxes

• • It helps in overestimating the value of assets