5th POA End of Term Revision

What is depreciation and why does it occur?

• Depreciation is the decrease in an asset's value over time due to usage, wear and tear, or obsolescence.

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

• Depreciation occurs only in real estate properties.

• Depreciation is a method of calculating profit margins.

List two main causes of depreciation.

• Increased demand

• Market fluctuations

• Inflation rates

• Physical wear and tear, obsolescence

Explain the Straight Line method of depreciation.

• The Straight Line method calculates depreciation based on the asset's market value.

• The Straight Line method of depreciation is a way to allocate the cost of an asset evenly over its useful life.

• The Straight Line method requires a variable rate of depreciation each year.

• The Straight Line method allows for accelerated depreciation in the first year.

How does the Reducing Balance method differ from the Straight Line method?

• The Straight Line method is used for tax purposes, while the Reducing Balance method is used for financial reporting.

• The Reducing Balance method results in decreasing depreciation expenses, while the Straight Line method results in constant annual expenses.

• The Reducing Balance method results in constant depreciation expenses, while the Straight Line method results in decreasing expenses.

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

What journal entry is made to record depreciation expense?

• Debit Accumulated Depreciation, Credit Depreciation Expense

• Debit Equipment, Credit Depreciation Expense

• Debit Depreciation Expense, Credit Cash

• Debit Depreciation Expense, Credit Accumulated Depreciation

How is the provision for depreciation account maintained?

• The provision for depreciation account is maintained by allocating the cost of assets over their useful lives through periodic depreciation expense calculations.

• The provision for depreciation account is maintained by recording the total asset cost as an expense immediately.

• The provision for depreciation account is maintained by ignoring the asset's useful life and not calculating depreciation.

• The provision for depreciation account is maintained by increasing the asset's value each year instead of decreasing it.

Describe how depreciation is treated in the Income Statement.

• Depreciation is recorded as an expense, reducing taxable income in the Income Statement.

• Depreciation is ignored in the Income Statement and does not affect taxable income.

• Depreciation is treated as an asset, increasing the overall value in the Income Statement.

• Depreciation is recorded as a revenue, increasing taxable income in the Income Statement.

What is accumulated depreciation and where is it shown on the Balance Sheet?

• Accumulated depreciation is a liability account that appears under current liabilities.

• Accumulated depreciation is an asset account that increases the value of fixed assets.

• Accumulated depreciation is an income account shown on the Income Statement.

• Accumulated depreciation is a contra asset account shown on the Balance Sheet, reducing the value of fixed assets.

How do you calculate the Net Book Value (NBV) of an asset?

• NBV = Original Cost - Accumulated Depreciation

• NBV = Original Cost + Accumulated Depreciation

• NBV = Market Value - Depreciation Expense

• NBV = Replacement Cost - Salvage Value

Why is it important to understand depreciation in accounting?

• Depreciation only affects cash flow management.

• Understanding depreciation is irrelevant for small businesses.

• Depreciation is only important for inventory valuation.

• Understanding depreciation is crucial for accurate financial reporting and tax compliance.