19 Lecture
MGT101
Midterm & Final Term Short Notes
Methods for Charging Depreciation (Continued)
Methods for charging depreciation (continued) may include the sum-of-the-years'-digits (SYD) method, the double-declining balance method, or the MACRS method, depending on the asset and business needs. Each method has its own formula and advanta
Important Mcq's
Midterm & Finalterm Prepration
Past papers included
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Which depreciation method is best suited for assets that have higher depreciation in the early years and lower depreciation in later years? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: b) Sum-of-the-years'-digits method
Which depreciation method is best suited for assets that become less efficient over time and need to be replaced sooner? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: c) Double-declining balance method
Which depreciation method is used for tax purposes in the United States? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: d) MACRS method
Which depreciation method results in a higher depreciation expense in the earlier years of an asset's life? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: c) Double-declining balance method
Which depreciation method is easiest to calculate and understand? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: a) Straight-line method
Which depreciation method can result in a negative book value for an asset at the end of its useful life? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: c) Double-declining balance method
Which depreciation method results in a constant depreciation expense each year? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: a) Straight-line method
Which depreciation method is most commonly used by businesses? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: a) Straight-line method
Which depreciation method takes into account the asset's salvage value? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: a) Straight-line method
Which depreciation method is most appropriate for assets that have a longer useful life? a) Straight-line method b) Sum-of-the-years'-digits method c) Double-declining balance method d) MACRS method Answer: a) Straight-line method
Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included
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What is depreciation, and why is it charged on fixed assets? Answer: Depreciation is the allocation of the cost of a fixed asset over its useful life. It is charged to recognize the reduction in the asset's value over time due to wear and tear, obsolescence, and other factors.
Define the straight-line method of depreciation. Answer: The straight-line method of depreciation is a method of allocating the cost of an asset uniformly over its useful life. It involves dividing the cost of the asset by its estimated useful life to arrive at an equal annual amount of depreciation.
Explain the difference between the reducing balance method and the straight-line method of depreciation. Answer: The reducing balance method is an accelerated method of depreciation, where the asset's cost is depreciated at a higher rate in the early years of its life and gradually reduced in later years. The straight-line method is a uniform method of depreciation, where the asset's cost is depreciated at the same rate over its useful life.
How does the double declining balance method work? Answer: The double declining balance method is an accelerated method of depreciation, where the asset's book value is multiplied by a fixed percentage, usually double the straight-line rate, to calculate the annual depreciation expense.
What is the units-of-production method of depreciation? Answer: The units-of-production method of depreciation is based on the actual usage of the asset. It involves calculating the cost per unit of production and multiplying it by the actual number of units produced to arrive at the depreciation expense for the year.
What is the difference between depreciation and amortization? Answer: Depreciation is the allocation of the cost of tangible fixed assets, while amortization is the allocation of the cost of intangible assets, such as patents, trademarks, and copyrights.
What are the factors that affect the choice of depreciation method? Answer: The factors that affect the choice of depreciation method include the nature and use of the asset, its useful life, and the company's accounting policies.
What is the salvage value of an asset, and how does it affect depreciation? Answer: The salvage value of an asset is the estimated value that the asset will have at the end of its useful life. It affects depreciation because it is subtracted from the asset's cost to determine the depreciable base.
How is depreciation expense recorded in the financial statements? Answer: Depreciation expense is recorded on the income statement as a separate line item, and the accumulated depreciation is shown on the balance sheet as a deduction from the gross fixed assets.
How does depreciation affect a company's taxable income? Answer: Depreciation reduces a company's taxable income, as it is deductible for tax purposes.
- Sum of years' digits (SYD) method: This method accelerates the depreciation charges in the early years of an asset's useful life, with declining charges in subsequent years.
- Units of production method: This method charges depreciation based on the actual usage of the asset. It's ideal for assets that undergo heavy usage, like machinery or vehicles.
- Group depreciation method: This method is used when assets have different useful lives. Assets with similar useful lives are grouped together, and depreciation is charged based on the average useful life of the group.
- Revaluation method: This method revalues assets annually and charges depreciation based on the revised values. It's useful when the value of assets changes frequently.
- Hybrid method: This method combines two or more depreciation methods to charge depreciation. It's helpful when assets have unique characteristics that make it difficult to apply a single depreciation method.