Q. If a company uses the declining balance method and has a depreciation rate of 30%, what is the depreciation expense for the first year on an asset costing $5,000?
A.
$1,500
B.
$1,000
C.
$1,200
D.
$1,500
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Solution
Depreciation expense = Cost x Depreciation Rate = $5,000 x 30% = $1,500.
Correct Answer:
A
— $1,500
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Q. If a company uses the sum-of-the-years'-digits method, how is the depreciation calculated?
A.
Based on the asset's age
B.
Based on the asset's cost and salvage value
C.
Based on the total number of years of useful life
D.
Based on the asset's market value
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Solution
The sum-of-the-years'-digits method calculates depreciation based on the total number of years of useful life.
Correct Answer:
C
— Based on the total number of years of useful life
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Q. If an asset costs $10,000, has a salvage value of $1,000, and a useful life of 5 years, what is the annual depreciation using the straight-line method?
A.
$1,800
B.
$2,000
C.
$1,500
D.
$1,200
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Solution
Annual depreciation = (Cost - Salvage Value) / Useful Life = ($10,000 - $1,000) / 5 = $2,000.
Correct Answer:
B
— $2,000
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Q. In the units of production method, depreciation expense is based on what?
A.
Time
B.
Usage
C.
Market value
D.
Cost
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Solution
The units of production method calculates depreciation based on the actual usage or production of the asset.
Correct Answer:
B
— Usage
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Q. What is the double declining balance method of depreciation?
A.
A method that accelerates depreciation.
B.
A method that spreads depreciation evenly.
C.
A method that only applies to intangible assets.
D.
A method that does not consider salvage value.
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Solution
The double declining balance method accelerates depreciation by applying a constant rate to the declining book value of the asset.
Correct Answer:
A
— A method that accelerates depreciation.
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Q. What is the effect of depreciation on the financial statements?
A.
Increases net income
B.
Decreases net income
C.
No effect on net income
D.
Increases cash flow
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Solution
Depreciation is an expense that reduces net income on the income statement.
Correct Answer:
B
— Decreases net income
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Q. What is the effect of not recording depreciation on financial statements?
A.
Assets will be overstated.
B.
Liabilities will be understated.
C.
Net income will be understated.
D.
Equity will be unaffected.
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Solution
Not recording depreciation will overstate the asset value on the balance sheet.
Correct Answer:
A
— Assets will be overstated.
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Q. What is the primary advantage of the declining balance method of depreciation?
A.
It is simple to calculate.
B.
It provides tax benefits in early years.
C.
It results in higher book value.
D.
It is the most commonly used method.
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Solution
The declining balance method allows for higher depreciation expenses in the early years, providing tax benefits.
Correct Answer:
B
— It provides tax benefits in early years.
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Q. Which accounting standard requires the use of systematic and rational allocation of depreciation?
A.
IFRS
B.
GAAP
C.
Both IFRS and GAAP
D.
Neither IFRS nor GAAP
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Solution
Both IFRS and GAAP require systematic and rational allocation of depreciation.
Correct Answer:
C
— Both IFRS and GAAP
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Q. Which depreciation method is best suited for assets that lose value quickly?
A.
Straight-line method
B.
Declining balance method
C.
Units of production method
D.
Sum-of-the-years'-digits method
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Solution
The declining balance method is best for assets that lose value quickly as it accelerates depreciation.
Correct Answer:
B
— Declining balance method
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Q. Which method of depreciation would result in the highest expense in the first year?
A.
Straight-line method
B.
Declining balance method
C.
Units of production method
D.
Sum-of-the-years'-digits method
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Solution
The declining balance method typically results in the highest expense in the first year due to its accelerated nature.
Correct Answer:
B
— Declining balance method
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