[Finals] Depreciation

Question 1

is the decrease in the values of physical property with the passage of time.

Answer 1

DEPRECIATION

Question 2

is the present worth of all future profits that are to be received through ownership of a particular property.

Answer 2

VALUE

Question 3

is the amount which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell.

Answer 3

MARKET VALUE

Question 4

is what the property is worth to the owner as an operating unit.

Answer 4

UTILITY OR USE VALUE

Question 5

is the value which is usually determined by a disinterested third party in order to establish a price that is fair to both seller and buyer.

Answer 5

FAIR VALUE

Question 6

is the worth of a property as shown on the accounting records of an enterprise

Answer 6

BOOK VALUE/ DEPRECIATED BOOK VALUE

Question 7

is the price that can be obtained from the sale of the property after it has been used.

Answer 7

SALVAGE VALUE/ RESALE VALUE

Question 8

is the amount the property would sell for if disposed off as junk.

Answer 8

SCRAP VALUE

Question 9

• To provide for the recovery if capital which has been invested in physical property.
• To enable the cost of depreciation to be charged to the cost of producing products or services that results from the use of the property.

Answer 9

PURPOSE OF DEPRECIATION

Question 10

TYPES OF DEPRECIATION

Answer 10

• Normal Depreciation
• Depreciation due to changes in price levels
• Depletion

Question 11

TYPES OF NORMAL DEPRECIATION

Answer 11

• Normal and Functional

Question 12

is the length of time during which it is capable of performing the function for which it was designed and manufactured.

Answer 12

PHYSICAL LIFE OF A PROPERTY

Question 13

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

Answer 13

ECONOMIC LIFE OF PROPERTY

Question 14

Symbol, Useful life of the property in years

Answer 14

L

Question 15

Symbol, the original cost

Answer 15

C_o

Question 16

Symbol, the value at the end of the life (e.g. scrap value, salvage value)

Answer 16

C_L

Question 17

Symbol, the annual cost of depreciation

Answer 17

d

Question 18

Symbol, the book value at the end of n years

Answer 18

C_n

Question 19

Symbol, depreciation up to age n years

Answer 19

D_n

Question 20

Depreciation Methods

Answer 20

• Straight Line Method
• Sinking Fund Method
• Declining Balance Method
• Double Declining Balance Method
• Sum of the Year Digits Method
• Service Output Method

Question 21

This method assumes that the loss in value is directly proportional to the age of the property.

Answer 21

STRAIGHT LINE METHOD

Question 22

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 time is assumed to be equal to the accumulated amount of the sinking fund at that time.

Answer 22

SINKING FUND FORMULA

Question 23

In this method, sometimes called the constant percentage method or the Matherson Formula, it is assumed that the annual cost of depreciation, is a fixed percentage of the salvage value at the beginning of the year. The ration of the depreciation in any year to the book value at the beginning of the year is constant throughout the life of the property and is designated by “k”, the rate of depreciation.

Answer 23

DECLINING BALANCE METHOD

Question 24

Symbol, rate of depreciation

Answer 24

k

Question 25

This method does not apply if the salvage value is zero.

Answer 25

DECLINING BALANCE METHOD

Question 26

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

Answer 26

DOUBLE DECLINING BALANCE METHOD

Question 27

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 27

SERVICE OUTPUT METHOD