depreciation

Question 1

the decrease in the value of a physical
property with the passage of time

Answer 1

Depreciation

Question 2

– this is due to the reduction of
the physical ability of an equipment or asset to produce
results

Answer 2

Physical depreciation

Question 3

this is due to the lessening
in the demand for the function which the property was
designed to render

Answer 3

Functional depreciation

Question 4

the cost of
acquiring an asset, including transportation expenses and
other normal costs of making the asset serviceable for its
intended us

Answer 4

Initial Investment/First Cost

Question 5

worth of property or an asset as
shown on the accounting records of the company. It is the
original cost of the property less all allowable
depreciation deduction

Answer 5

Book Value

Question 6

the amount that will be paid by a
willing buyer to a willing seller for a property after
depreciation is competed.

Answer 6

Salvage Value

Question 7

the expected period that a property will be used in trade or business to produce income.

Answer 7

Useful life (L)

Question 8

the length of time during which the
property is capable of performing the function

Answer 8

Physical life

Question 9

length of time during which the property may be operated at a profit.

Answer 9

Economic life

Question 10

the number of years over which
the basis of property is recovered through the accounting
process.

Answer 10

Recovery period (n)

Question 11

a percentage for each year of the
recovery period that utilized to compute an annual
depreciation deduction.

Answer 11

Recovery rate (i)

Question 12

Methods of Depreciation

Answer 12

Straight Line Method (SLM)
Sinking Fund Method (SFM)
Declining Balance Method
Double Declining Balance Method (DDBM)
Sum of the year digit method (SOYDM)
Service-Output Method (SOM)
6.1 Service Method (Number of hours used)
6.2 Output Method (Number of units produced)

Question 13

The simplest depreciation method. this method assumes that the loss in the value is directly proportional to the age of the equipment or asset.

Answer 13

Straight Line Method

Question 14

This method assumes that a sinking fund is established in which funds will accumulate for replacement. The total depreciation that has taken place up to any given times is assumed to be equal to the accumulated
amount in the sinking fund at that time.

Answer 14

Sinking Fund Method

Question 15

sometimes called the constant percentage method or the Matheson Formula

Answer 15

Declining Balance Method.

Question 16

assumed that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning of the year. The ratio of the depreciation in any year to the book value at the beginning of that year is constant throughout the life of the property and is designated by k, the rate of depreciation.

Answer 16

Declining balance method

Question 17

This method is very similar to the DBM except that the rate of depreciation k is replaced by 2/L

Answer 17

Double Declining Balance Method (DDBM)

Question 18

It is a method of evaluating depreciation where the depreciation changes from year to year.

Answer 18

Sum of the year digit method

Question 19

This method assumes that the total depreciation that has taken place is directly proportional to the quantity of output of the property up to that time. This method has the advantage of making the unit cost of depreciation constant and giving low depreciation expense during periods of low production.

Answer 19

Service Output Method