Depreciation

Question 1

Depreciation

Answer 1

Systematic allocation of the cost over the long-lived asset’s useful life

Question 2

Calculating Depreciation

Answer 2

To calculate depreciation, must determine:
1. The cost of the asset
2. Its estimated useful (productive) life
3. The estimated residual value

Question 3

Depreciation Methods

Answer 3

Three alternative methods:
– Straight-line
– Diminishing-balance
– Units-of-production

Question 4

How do companies decide what method to use?

Answer 4

best matches the pattern of consumption of the asset’s future economic benefits

Question 5

Straight-Line Method

Answer 5

• Depreciation expense is constant every year of asset’s useful life
• Depreciable amount: the amount to be depreciated

Question 6

Straight-Line Method Equation

Answer 6

Cost - residual value = depreciable amount/ useful life = annual depreciation

Question 7

Diminishing-Balance Method

Answer 7

• Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation)
• Depreciation rate remains constant, but depreciation expense declines each year

Question 8

Diminishing-Balance Method Equation

Answer 8

carrying amount x cca rate

Question 9

Double diminishing-balance method

Answer 9

• Depreciation expense based on asset’s diminishing carrying amount
• cost less accumulated depreciation
  Rate calculated by: (100%/year)x2

Question 10

Double diminishing-balance method Equation

Answer 10

Carrying amount at beginning of year X straight line x2 = annual depreciation expense

Question 11

Why do companies choose double diminishing-balance method

Answer 11

• Managers must choose the diminishing balance, or another accelerated method, if the company receives more economic benefit in the early years of the asset’s useful life than in the later years
• This method is used if the asset, for example, has higher revenue producing ability in its early years, or if the asset is expected to become less useful over time

Question 12

Units of production method

Answer 12

• Useful life expressed as total units of production or activity (ex. kilometers)
• Must estimate the total units of production that will be obtained from asset

Question 13

Units of production method equation

Answer 13

Cost - residual value = depreciable amount/ total estimated units of production = depreciable amount per unit x units of production during the year - annual depreciation expense