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What is the primary purpose of depreciation?
What is the primary purpose of depreciation?
- To allocate the cost of an asset over its useful life (correct)
- To increase the value of an asset
- To calculate the residual value of an asset
- To determine the selling price of an asset
Which method of depreciation results in a constant depreciation expense each year?
Which method of depreciation results in a constant depreciation expense each year?
- Declining Balance Method
- Double Declining Balance (DDB) Method
- Units-of-Production Method
- Straight-Line Method (correct)
What is the main characteristic of the Declining Balance Method?
What is the main characteristic of the Declining Balance Method?
- Depreciation expense is based on the number of units produced
- Depreciation expense is based on the level of activity or usage
- Depreciation expense is constant each year
- Depreciation expense decreases each year (correct)
Which method of depreciation is used when the level of activity or usage is the primary factor?
Which method of depreciation is used when the level of activity or usage is the primary factor?
What is the key difference between the Group Depreciation Method and the Composite Depreciation Method?
What is the key difference between the Group Depreciation Method and the Composite Depreciation Method?
Which two methods of depreciation are classified as accelerated depreciation methods?
Which two methods of depreciation are classified as accelerated depreciation methods?
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Study Notes
Depreciation Methods
What is Depreciation?
Depreciation is the systematic allocation of the cost of an asset over its useful life.
Depreciation Methods:
1. Straight-Line Method
- Depreciation expense is constant each year
- Calculation: (Cost - Residual Value) / Useful Life
2. Declining Balance Method
- Depreciation expense decreases each year
- Calculation: Depreciation Rate x Book Value
3. Units-of-Production Method
- Depreciation expense is based on the number of units produced
- Calculation: (Cost - Residual Value) / Total Units
4. Double Declining Balance (DDB) Method
- An accelerated depreciation method
- Calculation: 2 x Depreciation Rate x Book Value
5. Sum-of-the-Years' Digits (SYD) Method
- An accelerated depreciation method
- Calculation: Depreciation Rate x (Remaining Life / SYD)
6. Activity Method
- Depreciation expense is based on the level of activity or usage
- Calculation: Depreciation Rate x Units of Activity
7. Group Depreciation Method
- A single depreciation rate is applied to a group of assets
- Calculation: Depreciation Rate x Total Cost of Group
8. Composite Depreciation Method
- A single depreciation rate is applied to a group of assets with different lives
- Calculation: Depreciation Rate x Total Cost of Group
Note: These methods are used to calculate depreciation expense for financial reporting purposes. The choice of method depends on the company's accounting policy and the nature of the asset.
Depreciation Methods
- Depreciation is the systematic allocation of the cost of an asset over its useful life.
Depreciation Methods
- Straight-Line Method: Depreciation expense is constant each year, calculated as (Cost - Residual Value) / Useful Life.
- Declining Balance Method: Depreciation expense decreases each year, calculated as Depreciation Rate x Book Value.
- Units-of-Production Method: Depreciation expense is based on the number of units produced, calculated as (Cost - Residual Value) / Total Units.
- Double Declining Balance (DDB) Method: An accelerated depreciation method, calculated as 2 x Depreciation Rate x Book Value.
- Sum-of-the-Years' Digits (SYD) Method: An accelerated depreciation method, calculated as Depreciation Rate x (Remaining Life / SYD).
- Activity Method: Depreciation expense is based on the level of activity or usage, calculated as Depreciation Rate x Units of Activity.
- Group Depreciation Method: A single depreciation rate is applied to a group of assets, calculated as Depreciation Rate x Total Cost of Group.
- Composite Depreciation Method: A single depreciation rate is applied to a group of assets with different lives, calculated as Depreciation Rate x Total Cost of Group.
Choosing a Depreciation Method
- The choice of method depends on the company's accounting policy and the nature of the asset.
- These methods are used to calculate depreciation expense for financial reporting purposes.
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