Depreciation and Amortization Flashcards
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Which depreciation method applies a constant rate to the declining book value of an asset each period?
Answer: Double-declining balance method
The double-declining balance method applies a fixed rate (typically twice the straight-line rate) to the asset's book value at the start of each period, resulting in higher depreciation in early years.
An asset costs $50,000, has a salvage value of $5,000, and a useful life of 5 years. What is the annual straight-line depreciation?
Answer: $9,000
Straight-line depreciation = (Cost − Salvage Value) / Useful Life = ($50,000 − $5,000) / 5 = $9,000 per year.
Which term describes the systematic allocation of an intangible asset's cost over its useful life?
Answer: Amortization
Amortization is the process of spreading the cost of an intangible asset (such as a patent or copyright) over its estimated useful life.
What is the book value of a depreciable asset?
Answer: Original cost minus accumulated depreciation
Book value equals the asset's original cost less all accumulated depreciation recorded to date, representing its net carrying amount on the balance sheet.
The units of production depreciation method bases the depreciation charge on:
Answer: Actual usage or output of the asset
The units of production method allocates depreciation based on actual activity—such as units manufactured or hours used—making it ideal for assets whose wear is directly tied to use.
What is salvage value in the context of depreciation?
Answer: The estimated residual value at the end of the asset's useful life
Salvage value is the estimated amount an asset will be worth (or sold for) at the end of its useful life, and it is subtracted from original cost to determine depreciable cost.
Which of the following is NOT a recognized depreciation method under GAAP?
Answer: Perpetual inventory
Perpetual inventory is an inventory tracking system, not a depreciation method; GAAP-recognized depreciation methods include straight-line, declining balance, sum-of-years-digits, and units of production.