Depreciation Methods in BTEC Business
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Questions and Answers

What is the formula for calculating annual depreciation expense using the straight-line depreciation method?

  • Cost of Asset / Useful Life of Asset
  • (Cost of Asset - Residual Value) / Useful Life of Asset (correct)
  • Net Book Value at Start of Year x Depreciation Rate
  • Residual Value - Cost of Asset / Useful Life of Asset

Based on a £10,000 asset with a £2,000 residual value and a 5-year useful life, what is the annual depreciation expense using the straight-line method?

  • £2,000
  • £1,000
  • £1,600 (correct)
  • £1,200

What differentiates the reducing-balance depreciation method from the straight-line method?

  • It considers the residual value at the start.
  • It applies a fixed percentage to the net book value each year. (correct)
  • It results in the same depreciation amount each year.
  • It uses the original cost of the asset each year.

If an asset starts with a net book value of £10,000 and has a depreciation rate of 20%, what will be its net book value after the first year?

<p>£8,000 (B)</p> Signup and view all the answers

In the reducing-balance method, how does depreciation expense change over the years?

<p>It decreases each year. (A)</p> Signup and view all the answers

Flashcards

Straight-line Depreciation

A method that evenly spreads the cost of an asset over its useful life.

Annual Depreciation Expense

The amount of depreciation recorded each year for an asset.

Reducing-balance depreciation

Depreciation calculated as a fixed percentage of an asset's Net Book Value each year.

Net Book Value

Asset's value after accounting for previous depreciation.

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Depreciation Rate

Fixed percentage used to calculate depreciation each year.

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Study Notes

Depreciation Methods in BTEC Business

  • Two common methods for calculating depreciation are straight-line and reducing-balance.

Straight-Line Depreciation

  • Simplest and most common method.
  • Distributes asset cost evenly over its useful life.
  • Formula: (Cost of Asset - Residual Value) / Useful Life
    • Cost of Asset: Initial purchase price.
    • Residual Value: Estimated value at end of useful life.
    • Useful Life: Expected time the asset will be used.
  • Example: An asset costing £10,000, with a £2,000 residual value and 5-year useful life, has annual depreciation of £1,600.

Reducing-Balance Depreciation

  • Depreciation is a fixed percentage of the asset's net book value each year.
  • Results in higher depreciation expenses in early years.
  • Formula: Net Book Value at Start of Year × Depreciation Rate
    • Net Book Value: Asset's value at start of year, after previous depreciation.
    • Depreciation Rate: Fixed percentage set by the business.
  • Example: An asset with a £10,000 net book value and a 20% depreciation rate has an annual depreciation of £2,000, reducing the net book value to £8,000 after the first year.

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Description

This quiz covers the different methods of calculating depreciation, focusing on straight-line and reducing-balance methods. It explores formulas, examples, and the implications of each method on financial reporting. Perfect for BTEC Business students looking to enhance their understanding of asset management.

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