Module 26.2: Depreciation

Question 1

What is the Carrying Value (Book)?

Answer 1

the net value of an asset or liability on the balance sheet. For PP&E - equals historical cost minus accumulated depreiation.

Question 2

What is historical cost?

Answer 2

the original purchase price of the asset including installation and transportation costs.

Question 3

What is the formula for straight-line depreciation?

Answer 3

original cost - salvage value / depreciable life.

Question 4

What is the formula for double declining balance method of depreciation?

Answer 4

(2 / depreciable life in years) * book value at beginning of year x

Question 5

What is the formula for units-of-production method of depreciation? (AKA depletion)

Answer 5

[(original cost - salvage value) / life in output units] * output units in the period

Question 6

Under IFRS what form of depreciation is required?

Answer 6

components of an asset separately must be depreciated.

Question 7

Is the asset turnover ratio higher or lower if you use double declining?

Answer 7

Higher

Question 8

How can firms manipulate earnings using depreciation?

Answer 8

salvage value and useful life are an estimate, so by changing the salvage value a firm can modify dep expense.

Question 9

Does a longer useful life increase dep expense? What about salvage value?

Answer 9

No, decreases depreciation and increases net income.

higher estimate of salvage value also decreases dep expense.