Depreciation

Question 1

What is depreciation?

Answer 1

Depreciation is a systematic process for allocating the cost of an asset used in a business to the accounting periods in which the asset is used.

Question 2

Why is depreciation necessary?

Answer 2

Depreciation is necessary for measuring a company’s net income in each accounting period.

Question 3

What is the purpose of depreciation according to accountants?

Answer 3

To match the cost of an asset with the revenues earned by using the asset.

Question 4

List examples of assets that are typically depreciated.

Answer 4

• Buildings (excluding land)
• Machinery and equipment
• Trucks and automobiles
• Computer systems
• Furniture and fixtures
• Land improvements

Question 5

How are depreciable assets recorded?

Answer 5

Depreciable assets are initially recorded at their cost, which includes all costs necessary to get the asset ready for use.

Question 6

What is included in the cost of an asset?

Answer 6

All costs necessary to get the asset in place and ready for use.

Question 7

What formula is used to calculate depreciation expense for a year?

Answer 7

(Asset’s cost – estimated salvage value) / estimated years of useful life

Question 8

What is the estimated salvage value?

Answer 8

The amount that the company will receive at the end of the asset’s useful life.

Question 9

What is the difference between depreciation expense and accumulated depreciation?

Answer 9

Depreciation Expense is a temporary income statement account, while Accumulated Depreciation is a permanent contra asset account on the balance sheet.

Question 10

True or False: The balance in the Accumulated Depreciation account is closed at the end of each accounting year.

Answer 10

False

Question 11

What happens to the balance of the Depreciation Expense account at the end of the accounting year?

Answer 11

The balance is closed to a stockholders’ equity account and begins the next year with a balance of $0.

Question 12

What is the book value of an asset?

Answer 12

The difference between the debit balance in the asset account and the credit balance in Accumulated Depreciation.

Question 13

What are some methods of calculating depreciation?

Answer 13

• Straight-line method
• Units-of-activity or units-of-production method
• Double-declining-balance (DDB) method
• Sum-of-the-years’-digits (SYD) method

Question 14

Fill in the blank: The _______ method provides more depreciation expense in the early years of the asset’s useful life.

Answer 14

Double-declining-balance (DDB)

Question 15

What method is commonly used for computing and reporting depreciation?

Answer 15

Straight-line method

Question 16

What is the key difference in depreciation methods?

Answer 16

When the asset’s cost is reported as depreciation expense on the company’s income statements.

Question 17

True or False: The total amount of depreciation expense over an asset’s useful life can exceed the asset’s depreciable cost.

Answer 17

False

Question 18

What is book depreciation?

Answer 18

Depreciation that is reported on a company’s financial statements.