Depreciation and Amortization Flashcards

For an asset with a 4-year useful life, what is the sum of years digits used in the sum-of-years-digits depreciation method?

Answer: 10

The sum of years digits for a 4-year life is 1 + 2 + 3 + 4 = 10, which becomes the denominator in calculating each year's depreciation fraction.

Under the double-declining balance method, the depreciation rate applied to book value is:

Answer: Twice the straight-line rate

The double-declining balance rate is calculated as (1 / useful life) × 2, making it exactly twice the equivalent straight-line rate.

Which type of long-term asset is subject to depletion rather than depreciation?

Answer: Natural resources such as oil or timber

Depletion is used to allocate the cost of natural resources (such as oil, gas, coal, or timber) as they are extracted or harvested over time.

When an asset is fully depreciated, its book value equals:

Answer: Its salvage value

Depreciation stops when the book value equals the salvage value; a fully depreciated asset carries a book value equal to its estimated salvage value.

How is depreciation expense classified on the income statement?

Answer: A non-cash expense that reduces net income

Depreciation is a non-cash expense because it reduces net income without involving an actual cash outflow during the period it is recorded.

Which account is credited when recording a period's depreciation expense?

Answer: Accumulated Depreciation

The journal entry to record depreciation debits Depreciation Expense and credits Accumulated Depreciation, a contra-asset account that offsets the asset's original cost on the balance sheet.

An asset has an original cost of $80,000, a salvage value of $8,000, and a useful life of 8 years. What is the straight-line depreciation rate?

Answer: 12.5%

The straight-line rate is 1 / useful life = 1 / 8 = 12.5%, which is then applied to the depreciable cost each year.