What are the primary methods of calculating depreciation?

The primary methods of calculating depreciation are straight-line, declining balance, and units of production methods.

Fill in the blank: Amortization is primarily used for ___ and is similar to depreciation.

Intangible assets

True or False: Depreciation can be applied to land as it has a finite useful life.

False. Land is not depreciated because it does not have a finite useful life.

In the straight-line method of depreciation, how is the annual depreciation expense calculated?

Annual depreciation expense is calculated by subtracting the asset's salvage value from its cost and then dividing by its useful life.

What is the primary difference between depreciation and amortization?

The primary difference is that depreciation applies to tangible assets, while amortization applies to intangible assets.

Fill in the blank: The declining balance method applies a fixed percentage to the ___ of the asset each year.

Book value

What does the term 'salvage value' refer to in the context of depreciation?

Salvage value refers to the estimated residual value of an asset at the end of its useful life.

True or False: The units of production method of depreciation is best suited for assets whose wear and tear are based on usage rather than time.

True.

What is meant by the term 'useful life' when discussing depreciation?

Useful life refers to the estimated time period over which an asset is expected to be used in business operations.

Explain how the declining balance method can lead to a higher depreciation expense in the earlier years of an asset's life.

Declining balance method increases early depreciation.

• Applies constant percentage to value.

• Higher book value in early years.

• Results in larger initial expenses.

Fill in the blank: Under the straight-line method, if an asset costs $10,000, has a salvage value of $1,000, and a useful life of 5 years, the annual depreciation expense is ___ per year.

$1,800

What impact does depreciation have on financial statements?

Depreciation reduces taxable income and reflects the wear and tear of assets, impacting both the income statement and the balance sheet.

True or False: Amortization schedules are only relevant for loans and not for intangible assets.

False. Amortization schedules are relevant for both loans and the amortization of intangible assets.

In what scenarios might a company choose to use the units of production method for depreciation?

Units of production method is usage-based.

• Reflects actual asset usage.

• Aligns costs with production levels.

• Useful for manufacturing assets.

What is the significance of estimating the salvage value accurately in the depreciation calculation?

Estimating salvage value is crucial.

• Impacts depreciation calculations.

• Affects financial reporting accuracy.

• Influences asset valuation decisions.