23 Questions
What is the main reason for switching from one depreciation method to another?
To accelerate the depreciation of book value of the asset and have tax benefits
The book value calculated by the double-declining balance (DDB) method always reaches zero
False
What is the estimated salvage value of the asset at the end of its useful life in Example-3?
Zero
The double-declining balance method is switched to the ______________ method to ensure that the book value does not fall below the estimated salvage value of the asset.
straight-line
What is the formula to calculate the constant annual depreciation rate 'dm' in the double-declining balance (DDB) method?
dm = 2 / n
The switching from double-declining balance method to straight-line method is done when the depreciation amount for a given year by the currently used method is more than that by the new method.
False
Match the following depreciation methods with their characteristics:
Double-Declining Balance (DDB) = Book value never reaches zero Straight-Line (SL) = Ensures book value does not fall below salvage value
What is the depreciation amount in Year 1 using the Double-Declining Balance (DDB) method?
Rs. 222000
The Straight-Line (SL) method is used throughout the entire depreciation period in the table.
False
What is the book value of the asset at the end of Year 5?
Rs. 285034.86
The asset is switched from the Double-Declining Balance method to the Straight-Line method in Year _______.
6
What is the total depreciation amount from Year 1 to Year 3 using the DDB method?
Rs. 418089.05
The depreciation amount using the SL method is the same for each year.
True
Match the following depreciation methods with their characteristics:
Double-Declining Balance (DDB) method = Depreciation amount decreases over time Straight-Line (SL) method = Depreciation amount remains constant over time
The final book value of the asset at the end of Year 9 is Rs. ___________.
0
What is the main reason for obsolescence of an asset?
Availability of new technology or new product
Depreciation is a physical cash outflow.
False
What is the term for the estimated market value of an asset at the end of its useful life?
Salvage value
Depreciation is calculated on a ______________ basis.
yearly
What is the impact of depreciation on income tax?
It reduces the income tax
Match the following terms with their definitions:
Initial Cost = Total cost of acquiring the asset Salvage Value = Estimated market value at the end of useful life Book Value = Value of asset recorded on accounting books Useful Life = Period of time during which asset is used
Depreciation is not considered as an expenditure in the cash flow of the asset.
False
What is the term for the value of an asset recorded on the accounting books of the firm at a given time period?
Book value
Study Notes
Depreciation
- Depreciation represents the reduction in market value of an asset due to age, wear and tear, and obsolescence.
Types of Depreciation
- Physical deterioration of the asset occurs due to wear and tear with passage of time.
- Obsolescence occurs due to availability of new technology or new product in the market that is superior to the old one.
Assets Subject to Depreciation
- Tangible assets for which depreciation analysis is carried out are:
- Construction equipments
- Buildings
- Electronic products
- Vehicles
- Machinery
Depreciation Calculation
- Depreciation amount for any asset is usually calculated on a yearly basis.
- Depreciation is considered as expenditure in the cash flow of the asset, although there is no physical cash outflow.
Effect of Depreciation on Income Tax
- Depreciation affects the income tax to be paid by an individual or a firm as it is considered as an allowable deduction in calculating the taxable income.
- Depreciation reduces the taxable income and hence results in lowering the income tax to be paid.
Terms Used in Depreciation Analysis
- Initial cost: the total cost of acquiring the asset.
- Salvage value: represents estimated market value of the asset at the end of its useful life.
- Book value: the value of asset recorded on the accounting books of the firm at a given time period.
- Useful life: the period for which the asset is expected to be in use.
Switching between Depreciation Methods
- Switching from one depreciation method to another is done to accelerate the depreciation of book value of the asset and thus to have tax benefits.
- The most commonly used switch is from double-declining balance (DDB) method to straight-line (SL) method.
Example of Switching between Depreciation Methods
- Initial cost of an asset is Rs.1000000, has a useful life of 9 years, and an estimated salvage value of zero.
- Switching from double-declining balance method to straight-line method ensures that the book value does not fall below the estimated salvage value of the asset.
- The year in which switching is done from double-declining balance method to straight-line method is determined based on the depreciation amount calculated using both methods.
This quiz covers the concept of switching between different depreciation methods in construction economics and finance, including the reasons and benefits of doing so.
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