Chapter 35, Depreciation

Question 1

Depreciation

Answer 1

the concept of a fixed asset losing value over time

Question 2

Depreciation terminology

Answer 2

• Net Book value (cost minus the amounts are taken off)
• Life of an asset
• Accumulated Depreciation (addition each year)
• Residual Value (value at the end of its useful life)
• Historic Cost (initial cost)

Question 3

Methods of measuring Depreciation

Answer 3

• Straight line method: equal amount is taken off the value of an asset annually
  (initial cost - residual value / life of asset)
• Reducing (Declining) balance: Reduces at a constant percentage

Question 4

Advantages of Straight line

Answer 4

• amount of depreciation is lower in the first few years
• shows the business is of higher value
• profit will be higher in early stages of the business

Question 5

Disadvantages of Straight line

Answer 5

• an estimate of the residual value is required
• It assumes that lif of asset is known
• the value of the business may appear inflated

Question 6

Advantages of declining balance

Answer 6

• more realistic

- no estimate of residual value

Question 7

Disadvantages of declining balance

Answer 7

• makes it harder to borrow due to the lower value of assets