Understanding Depreciation Methods

What is depreciation in financial accounting?

• Depreciation is the allocation of the cost of a tangible asset over its useful life.

• Depreciation is the process of selling an asset for profit.

• Depreciation refers to the total cost of an asset at the time of purchase.

• Depreciation is the increase in value of an asset over time.

Name the two main categories of depreciation methods.

• Declining balance depreciation and unit of production depreciation

• Market value depreciation and historical cost depreciation

• Tax depreciation and book depreciation

• Straight-line depreciation and accelerated depreciation

Explain the straight-line method of depreciation.

• The straight-line method allows for accelerated depreciation in the first year.

• The straight-line method calculates depreciation based on the asset's market value.

• The straight-line method requires a variable rate of depreciation each year.

• The straight-line method of depreciation spreads the cost of an asset evenly over its useful life.

How is the declining balance method calculated?

• Depreciation is calculated by adding a fixed amount each period.

• Depreciation is calculated by subtracting the salvage value from the book value.

• Depreciation is determined by the original cost divided by the useful life.

• Depreciation is calculated by multiplying the book value by a fixed percentage each period.

What is the units of production method?

• A fixed percentage depreciation method regardless of usage.

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

• A depreciation method based on the asset's usage or output.

• A method that only considers the initial cost of the asset.

Which depreciation method is most commonly used?

• Declining balance method

• Straight-line method

• Sum-of-the-years'-digits method

• Units of production method

What factors influence the choice of depreciation method?

• Market demand for the asset

• Nature of the asset, expected economic benefits, tax regulations, and financial reporting objectives.

• Location of the asset

• Historical cost of the asset

How does depreciation affect financial statements?

• Depreciation decreases asset values on the balance sheet and reduces net income on the income statement.

• Depreciation increases asset values on the balance sheet.

• Depreciation has no effect on net income or asset values.

• Depreciation only affects cash flow statements.

What is the impact of accelerated depreciation on taxes?

• Accelerated depreciation only affects property value, not taxes.

• Accelerated depreciation increases taxable income and raises tax liability.

• Accelerated depreciation has no effect on taxes whatsoever.

• Accelerated depreciation reduces taxable income and lowers tax liability in the early years.

Define salvage value in the context of depreciation.

• Salvage value is the total cost of acquiring an asset.

• Salvage value is the estimated value of an asset at the end of its useful life.

• Salvage value is the market price of an asset during its useful life.

• Salvage value is the amount of depreciation charged each year.