Topic 8: Balance Day Adjustments (Depreciation)

Question 1

What is the formula for the Straight Line Method?

Answer 1

(Historical Cost - Residual Value) x %

*If Residual Value not Given = 0

Question 2

What is the formula for the Units of Use Method?

Answer 2

(Historical Cost - Residual Value) x Units/Total Units

Question 3

What is the formula for the Reduced Balance Method?

Answer 3

(Historical Cost - Acc. Depn) x %

Question 4

Why are Non-Current Assets Depreciated?

Answer 4

We use assets therefore need to allocate the cost of an asset over its useful life.

Question 5

Why are assets not depreciated using market value?

Answer 5

Business’s use assets differently to other businesses, hence not appropriate.

Question 6

What are two factors that influence the value of a depreciation calculation?

Answer 6

Historical cost of asset

Type of depreciation used

Question 7

Which two factors cause loss of value of assets?

Answer 7

• Deterioration (wear and tear)

- Obsolescence (new tech)

Question 7

What is the Straight Line Method of Depreciation?

Answer 7

Depreciates the asset with same depreciation value from one period to another.
Example: Furniture, Office Equipment

Question 8

What is the Units of Use Method of Depreciation?

Answer 8

Based off actual usage of asset.

Examples: Motor Vehicle, Specific Equipment

Question 9

What is the Reducing Balanced Method of Depreciation?

Answer 9

Assumes the asset will add more revenue in its early years than its later years.
Examples: Technology, Motor Vehicle

Question 10

What is the process when comparing types of Depreciation?

Answer 10

1. Describe How Asset is used
2. Describe How the Asset is currently being depreciated
3. What method of depreciation should be used instead