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Quizzes > High School Quizzes > Career

Ace the Depreciation Practice Quiz

Sharpen your skills with practical quiz exercises

Difficulty: Moderate
Grade: Grade 10
Study OutcomesCheat Sheet
Colorful paper art promoting the Depreciation Demystified Quiz for accounting students.

What is depreciation in accounting?
An increase in the market value of an asset over time.
The immediate expensing of the total cost of the asset in the year of purchase.
The systematic allocation of the cost of a tangible asset over its useful life.
A method to determine the profit margin on asset sales.
Depreciation allocates the cost of a tangible asset over its useful life. This method matches the expense with the revenue generated over time.
Which of the following is NOT a depreciation method?
Straight-line method
Sum-of-the-years-digits method
Declining balance method
Profit-and-loss method
The profit-and-loss method is not a recognized depreciation method. Depreciation methods typically include the straight-line, declining balance, and sum-of-the-years-digits methods.
In the straight-line depreciation method, how is depreciation expense calculated?
Cost divided by useful life
Cost minus salvage value divided by useful life
Cost plus salvage value divided by useful life
Salvage value divided by useful life
The straight-line method calculates depreciation expense by subtracting the salvage value from the cost and then dividing by the useful life. This method ensures a consistent expense each year.
What does 'salvage value' refer to?
The current market price of an asset.
The initial cost of acquiring an asset.
The estimated residual value of an asset at the end of its useful life.
The total depreciation expense over the asset's life.
Salvage value is the estimated amount that an asset can be sold for at the end of its useful life. It is subtracted from the asset's original cost to determine total depreciable value.
Why is depreciation important in financial reporting?
It represents a cash outflow that must be tracked.
It allows companies to avoid paying taxes.
It increases the asset value on the balance sheet.
It helps match the cost of an asset with the revenues it generates.
Depreciation is a non-cash expense that spreads the cost of an asset over its useful life. This matching of expense with revenue helps provide a more accurate view of financial performance over time.
Which depreciation method results in the same expense amount each year?
Declining balance method
Double declining balance method
Straight-line method
Units-of-production method
The straight-line method results in an equal amount of depreciation expense each year. This method spreads the depreciable cost evenly over the asset's useful life.
A company purchases equipment for $50,000 with a salvage value of $5,000 and a useful life of 5 years. What is the annual depreciation expense using the straight-line method?
($50,000 - $5,000) / 5 = $9,000 per year
$9,500 per year
$8,000 per year
$10,000 per year
Using the straight-line formula, the depreciation expense is calculated as (Cost - Salvage Value) / Useful Life, which equals ($50,000 - $5,000)/5 = $9,000 per year. This evenly spreads the asset's cost over its life.
In the declining balance method, which factor is applied to the book value?
The useful life in years
The asset's salvage value
A constant depreciation rate
The original cost only
The declining balance method applies a constant depreciation rate to the asset's book value each year. This results in higher depreciation costs in the earlier years and decreasing amounts in later years.
Which statement best describes the units-of-production depreciation method?
Depreciation is calculated by evenly allocating the asset's salvage value.
Depreciation declines over time using a fixed percentage of the asset's cost.
Depreciation is based on actual usage or production output.
Depreciation expense remains constant throughout the asset's life.
The units-of-production method ties depreciation expense directly to the asset's usage or produced units. This approach is particularly useful when an asset's wear and tear is more closely related to its level of activity than to the passage of time.
How does accelerated depreciation affect early years' expenses?
It defers all depreciation expenses to later years.
It decreases depreciation expense in early years.
It spreads the depreciation equally over all years.
It increases depreciation expense in early years.
Accelerated depreciation methods allocate a larger expense in the early years and a smaller expense in later years. This has the effect of reducing taxable income earlier in the asset's life.
If an asset's salvage value is high relative to its cost, the annual depreciation expense will be:
Equal to the cost
Unaffected by the salvage value
Lower
Higher
A higher salvage value reduces the total depreciable amount (Cost - Salvage Value), resulting in a lower annual depreciation expense. This reflects the fact that more residual value remains at the end of the asset's life.
What is one potential disadvantage of the declining balance method?
It produces a constant depreciation expense each year.
It does not consider the asset's salvage value.
It can be more complex to calculate.
It results in no depreciation in the early years.
The declining balance method can be more complex due to the application of a percentage rate on a reducing book value each period. This complexity can make it harder to predict and reconcile depreciation expenses.
Which depreciation method is often used when the usage of an asset varies significantly from year to year?
Double declining balance method
Sum-of-the-years-digits method
Units-of-production method
Straight-line method
The units-of-production method bases depreciation on actual usage, making it ideal for assets whose output varies from year to year. This method aligns expense recognition more closely with the benefits received.
When using the double declining balance method, what is the depreciation rate in relation to the straight-line rate?
Double the straight-line rate
Not related to the straight-line rate
Half the straight-line rate
The same as the straight-line rate
The double declining balance method uses a rate that is twice the straight-line rate. This accelerates the depreciation, resulting in higher expenses in the initial years compared to the straight-line method.
Which factor does NOT affect the calculation of depreciation expense?
Cash flow
Cost of the asset
Useful life
Salvage value
Depreciation expense is calculated based on the cost, useful life, and salvage value of an asset. Cash flow is not a factor in calculating depreciation, as depreciation is a non-cash expense.
A business buys a machine for $120,000 with an estimated salvage value of $20,000 and a useful life of 8 years. Using the double declining balance method, what is the approximate depreciation expense in the first year?
$15,000
$12,500
$40,000
$30,000
For the double declining balance method, the straight-line rate is 12.5% (100%/8), and the double rate is 25%. Multiplying 25% by the cost of $120,000 gives a first-year depreciation expense of $30,000.
Which depreciation method may result in a book value that never reaches the salvage value without a switch in calculation method?
Straight-line method
Units-of-production method
Double declining balance method
Sum-of-the-years-digits method
The double declining balance method continuously depreciates a fixed percentage of the remaining book value, which can result in a book value that asymptotically approaches but does not reach the salvage value. Often, companies switch to the straight-line method to fully depreciate the asset to its salvage value.
Consider a scenario where an asset's production output is irregular. Which depreciation method would likely provide the most accurate matching of expense to usage?
Accelerated depreciation method
Double declining balance method
Units-of-production method
Straight-line method
The units-of-production method bases depreciation on actual output or usage, which makes it ideal for assets with irregular production levels. This approach ensures that expense recognition is closely linked to the asset's usage.
For tax purposes, companies sometimes prefer accelerated depreciation methods over the straight-line method because:
They defer all tax liabilities indefinitely.
They simplify accounting records.
They increase reported net income.
They reduce taxable income in the initial years.
Accelerated depreciation methods front-load the depreciation expense, which reduces taxable income in the early years. This tax benefit is one reason companies may opt for accelerated methods over the straight-line method.
When switching from the declining balance method to the straight-line method for depreciation, what is the primary reason for making the switch?
To accelerate depreciation further.
To simplify tax calculations.
To ensure the asset's book value is accurately not lower than its salvage value.
To revalue the asset to its market value.
Companies may switch from the declining balance method to the straight-line method to prevent the asset's book value from falling below its salvage value. This switch ensures that the remaining depreciable cost is allocated evenly over the remaining useful life.
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Study Outcomes

  1. Understand key concepts of accounting depreciation.
  2. Analyze various methods used to calculate depreciation.
  3. Apply depreciation formulas to practical examples.
  4. Interpret the impact of depreciation on financial statements.
  5. Differentiate between straight-line and declining balance methods.

Depreciation Quiz: Practice Test Cheat Sheet

  1. Understanding Depreciation - Think of depreciation as the magic fade of an asset's value over time, capturing wear, tear, and aging in your books. It ensures you match the cost of that shiny new machine or office gadget with the revenue it actually helps you earn. Investopedia: Depreciation
  2. Straight‑Line Depreciation Method - This trusty method spreads the asset's cost evenly across its useful life, giving you a simple, predictable expense each year. Just subtract salvage value from cost and divide by the number of years. CFI: Straight‑Line Depreciation
  3. Double Declining Balance Method - Want front‑loaded depreciation? Double the straight‑line rate and apply it to your asset's book value, so you expense more early on and less later - perfect for tech or fast‑fading gear. This method helps reduce taxable income quickly in the early years. CFI: Double Declining Balance
  4. Units of Production Method - Tie depreciation to actual use: the more hours or units produced, the bigger the expense. This aligns costs directly with output, making it ideal for machines or vehicles with variable workloads. CFI: Units of Production
  5. Sum‑of‑the‑Years‑Digits Method - Another accelerated favorite, this method applies a shrinking fraction each year based on the sum of the asset's lifespan digits (e.g., 5‑year life = 5+4+3+2+1 = 15). Higher expenses early on, lower later - great for front‑loading write‑offs. CFI: Sum‑of‑the‑Years‑Digits
  6. Depreciation and Taxes - Depreciation isn't just bookkeeping - it's a tax shield. By spreading an asset's cost over its life, you lower taxable income year after year. Different methods can shift when you get the biggest tax break, so pick wisely! Investopedia: Depreciation & Taxes
  7. Book Value and Salvage Value - Book value tracks what's left after accumulating depreciation; salvage value is your crystal‑ball guess of what you'll sell the asset for when it's worn out. These two figures form the backbone of every depreciation calculation. Investopedia: Book & Salvage Value
  8. Choosing the Right Depreciation Method - No one‑size‑fits‑all here: machinery with irregular usage loves units of production, while office furniture might be happiest with straight‑line. Think about your asset's life cycle, tax goals, and reporting style before committing. CFI: Choosing a Method
  9. Impact on Financial Statements - Depreciation shows up on both the income statement (reducing net income) and the balance sheet (lowering asset values). Understanding this double act is key to accurate ratios, projections, and investor insights. Investopedia: Financial Impact
  10. Industry‑Specific Practices - Different industries play by different rules: manufacturers often pick units of production, tech firms may front‑load with accelerated methods, and service outfits stick with straight‑line. Spotting these trends can help you benchmark and strategize. CFI: Industry Practices
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