Understanding Depreciation Methods

What is straight-line depreciation?

• A technique for estimating future cash flows

• A method of calculating interest on loans

• Straight-line depreciation is a method of allocating the cost of an asset evenly over its useful life.

• A way to increase asset value over time

How is straight-line depreciation calculated?

• Straight-line depreciation = (Cost + Salvage Value) / Useful Life

• Straight-line depreciation = (Cost - Salvage Value) / Useful Life

• Straight-line depreciation = Cost / Useful Life

• Straight-line depreciation = (Cost - Useful Life) / Salvage Value

What are the advantages of using straight-line depreciation?

• It requires complex calculations for each asset.

• It allows for accelerated tax benefits.

• It is only applicable to intangible assets.

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

What is the formula for calculating straight-line depreciation?

• (Cost - Salvage Value) / Useful Life

• (Cost + Salvage Value) / Useful Life

• Cost / (Salvage Value + Useful Life)

• (Cost - Useful Life) / Salvage Value

In straight-line depreciation, what does the term 'useful life' refer to?

• The rate at which the asset loses value.

• The total cost of the asset.

• The market value of the asset after depreciation.

• The estimated period an asset is expected to be used.

What is the declining balance method of depreciation?

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

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

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

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

How does the declining balance method differ from straight-line depreciation?

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

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

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

• The declining balance method results in higher depreciation in early years, while straight-line depreciation spreads costs evenly over time.

What is the formula for calculating depreciation using the declining balance method?

• Depreciation Expense = Annual Revenue x Depreciation Rate

• Depreciation Expense = Total Cost x Useful Life

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

• Depreciation Expense = Salvage Value - Book Value

What is the significance of the depreciation rate in the declining balance method?

• The depreciation rate determines the asset's market value.

• The depreciation rate is fixed and does not change over time.

• The depreciation rate only affects cash flow, not financial statements.

• The depreciation rate affects the amount of depreciation expense recognized each year, influencing financial statements and tax liabilities.

What are the advantages of using the declining balance method?

• Simplified accounting process

• Advantages of using the declining balance method include accelerated depreciation, tax benefits, improved cash flow, and better expense-revenue matching.

• Higher initial depreciation expense

• Increased asset value over time