2. Depreciation methods

Question 1

What is depreciation?

Answer 1

It is the process by which a company allocates an asset’s cost over the duration of its useful life

Question 2

What is the purpose of recording depreciation as an expense?

Answer 2

Businesses record depreciations as expenses in order to spread the initial price of an asset over its useful life

Question 3

What are the 3 depreciation methods recognised by Romanian law?

Answer 3

1. Straight-line depreciation
2. Declining-balance depreciation
3. Accelerated depreciation

Question 4

How does the straight-line depreciation method work?

Answer 4

The cost of an asset is attributed consistantly over the entire life-time of the asset

Question 5

How does the declining-balance depreciation method work?

Answer 5

This method writes-off depreciation costs more quickly than the straight-line method.

The purpose behind this is to minimize taxable income.

The straight-line depreciation norm is adjusted as follows:
* 1.5 if the life-time of the fixed asset is from 2 to 5 years
* 2 if the life-time of the fixed asset is from 5 to 10 years
* 2.5 if the life-time of the fixed asset is longer than 10 years

Question 6

What are the kinds of declining-balance depreciation methods?

Answer 6

• Taking obsolescence into account
• Without taking obsolescence into account

Question 7

How does the declining-balance depreciation method (without taking obsolescence into account) work?

Answer 7

1. In the first year, the norm is applied to the initial value of the asset
2. In the following years, the same norm is applied but to the book value this is repeated as long as the yearly charge is higher than the straight-line method
3. After the charge is smaller or equal to the straight-line method, we switch to the straight line method for the remaining period

Question 8

How does the accelerated depreciation method work?

Answer 8

For the first year, we can use any depreciation norm up to 50%.

In the following years we use the straight line method, being applied to the net book value after the first year

Question 9

What are the factors to be considered when using the declining balance method taking into account obsolescence?

Answer 9

• the initial value for the first year and the net-book value for all the following years of this lifetime
• the standard life time, as given in the directory
• the declining-balance depreciation norm
• the time period for which the yearly charge will be computed