Depreciation and Value Concepts
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Questions and Answers

What is the purpose of depreciation in business?

  • To enhance the performance of machinery
  • To increase the market value of assets
  • To recover capital invested in property (correct)
  • To ignore the decrease in property values

    • Salvage value represents the initial cost of an asset at the end of its useful life.

    False (B)

    What is the definition of useful life in the context of depreciation?

    The expected period that a property will be used to produce income.

    The _____ method is the simplest depreciation method that assumes a constant amount is depreciated each year.

    <p>Straight Line</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Depreciation = The decrease in value of physical properties over time Book Value = Original cost less all allowable depreciation Salvage Value = Estimated value at the end of useful life Value = Present worth of future profits from ownership</p> Signup and view all the answers

    Which of the following methods calculates depreciation using a constant rate?

    <p>Straight Line Method (A)</p> Signup and view all the answers

    Book value represents the market value of an asset.

    <p>False (B)</p> Signup and view all the answers

    What happens to the book value of an asset as depreciation is applied?

    <p>It decreases over time.</p> Signup and view all the answers

    What is the formula for calculating yearly depreciation using the Sum-of-the-Year-Digits Method?

    <p>Depreciation = (Cost - Salvage Value) * (Remaining Useful Life / Sum of the Years)</p> Signup and view all the answers

    How many years is the lifespan (N) of the machine?

    <p>10</p> Signup and view all the answers

    Depreciation for the first year is approximately _____ after calculating with the percentage annual depreciation.

    <p>Php 4,113.44</p> Signup and view all the answers

    What is the book value at the end of the first year?

    <p>Php 15,886.56 (D)</p> Signup and view all the answers

    The depreciation amount decreases over the years.

    <p>True (A)</p> Signup and view all the answers

    What is the depreciation in the second year?

    <p>Php 3,267.42</p> Signup and view all the answers

    The book value at the end of the third year is approximately _____ after subtracting the depreciation.

    <p>Php 10,023.74</p> Signup and view all the answers

    What percentage is used to calculate the annual depreciation?

    <p>20.57% (C)</p> Signup and view all the answers

    What is the salvage value (SV) of the machine based on a first cost (FC) of Php 20,000?

    <p>Php 2,000 (D)</p> Signup and view all the answers

    The book value of the machine at the end of year 1 is Php 18,200.

    <p>True (A)</p> Signup and view all the answers

    What is the percentage of depreciation applied each year under the decline balance method?

    <p>10%</p> Signup and view all the answers

    The book value of the machine at the end of year 2 is ______.

    <p>16,400</p> Signup and view all the answers

    Match each year with the correct book value of the machine at the end of that year:

    <p>End of Year 1 = 18,200 End of Year 2 = 16,400 End of Year 3 = 14,600 End of Year 0 = 20,000</p> Signup and view all the answers

    What is the book value of the machine at the end of year 3?

    <p>Php 14,600 (A)</p> Signup and view all the answers

    The decline balance method allows for a variable depreciation rate based on the age of the asset.

    <p>False (B)</p> Signup and view all the answers

    How is the depreciation for the nth year estimated in the decline balance method?

    <p>D_n = R * Book Value of the property at the beginning of the nth year</p> Signup and view all the answers

    The first cost of the machine is ______.

    <p>20,000</p> Signup and view all the answers

    What will happen to the book value each year if the percentage of depreciation remains constant?

    <p>It will decrease (B)</p> Signup and view all the answers

    What is the annual depreciation charge for an equipment costing Php 500,000 with a salvage value of Php 40,000 and a useful life of 10 years?

    <p>Php 46,000 (B)</p> Signup and view all the answers

    The straight-line method of depreciation assumes that all the value is depreciated in the first year.

    <p>False (B)</p> Signup and view all the answers

    What is the formula for calculating total depreciation at year 'n'?

    <p>D * n</p> Signup and view all the answers

    The total depreciation for a machine after 6 years, given a yearly depreciation of Php 46,000, is _________.

    <p>Php 276,000</p> Signup and view all the answers

    Which of the following does not affect the calculation of annual depreciation using the straight-line method?

    <p>Current Market Value (A)</p> Signup and view all the answers

    The salvage value of an asset is the same as its first cost.

    <p>False (B)</p> Signup and view all the answers

    What is the book value of an asset at the end of 6 years if the original cost was Php 500,000 and the total depreciation is Php 276,000?

    <p>Php 224,000</p> Signup and view all the answers

    The straight-line method divides the total _________ by the useful life of the asset.

    <p>cost</p> Signup and view all the answers

    Match the following equipment lifespans with their corresponding estimates:

    <p>Processing equipment = 10 years Machine = 10 years Vehicle = 5 years Computer = 3 years</p> Signup and view all the answers

    Study Notes

    Depreciation

    • Depreciation is the decrease in value of physical properties over time.
    • For equipment and machines, it's the decrease in value and service capacity.
    • Depreciation is a result of natural wear, obsolescence, damage, corrosion, and weathering.

    Value

    • Value is the present worth of all future profits from owning a property.

    Salvage Value (Market Value)

    • Salvage value is the estimated value of a property at the end of its useful life.

    Useful Life (Depreciable Life)

    • Useful life is the estimated period a property is used for income production.

    Book Value

    • Book value is the worth of a depreciable property, found in accounting records.
    • It's calculated as the original cost minus allowable depreciation.

    Purpose of Depreciation

    • Depreciation is crucial to project analysis, primarily for two reasons:
      • Recovery of invested capital in physical property.
      • Charging depreciation costs to the cost of producing products or services, which is deductible in calculating profits subject to income taxes.

    Straight Line Method (SLM)

    • The straight-line method is the simplest depreciation method.
    • A constant amount is depreciated each year over the useful life of the property.

    Double Declining Balance Method (DBM)

    • DBM depreciates the asset at a constant percentage of the remaining value each year.
    • It's sometimes called the constant percentage method or the Matheson formula.

    Sum-of-the-Year's Digit Method (SYDM)

    • Depreciation for any year is the product of the depreciation factor for that year.
    • The depreciation factor for a specific year is computed by dividing the remaining years by the sum of all years of useful life.

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    Description

    Explore the essential concepts of depreciation, value, salvage value, and useful life in this quiz. Understand how these terms affect accounting and project analysis. Test your knowledge about these foundational principles in asset management.

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