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Questions and Answers
What is the formula for calculating annual depreciation expense using the straight-line depreciation method?
What is the formula for calculating annual depreciation expense using the straight-line depreciation method?
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?
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?
What differentiates the reducing-balance depreciation method from the straight-line method?
What differentiates the reducing-balance depreciation method from the straight-line method?
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?
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?
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In the reducing-balance method, how does depreciation expense change over the years?
In the reducing-balance method, how does depreciation expense change over the years?
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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.
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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.
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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.
