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The MCQs below are drawn from the Accountancy & Auditing subject category.
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2461
How does the annual depreciation expense behave over time under the Written Down Value (diminishing balance) method?
Under the Written Down Value method, depreciation is calculated as a fixed percentage of the asset's book value at the beginning of each year. Since the book value decreases annually due to accumulated depreciation, the resulting depreciation charge also decreases each year.
2462
Under the diminishing balance method, how is the annual depreciation expense determined?
The diminishing balance method, also known as the written down value method, applies a fixed percentage of depreciation to the asset's remaining book value at the beginning of each period. As the book value decreases over time due to accumulated depreciation, the annual depreciation charge also decreases, reflecting the asset's declining utility and value.
2463
Which method of depreciation is typically preferred or mandated by income tax authorities for tax reporting purposes?
Tax authorities in many jurisdictions prefer the Written Down Value (WDV) method because it allows for higher depreciation charges in the earlier years of an asset's life. This approach effectively reduces taxable income more significantly during the initial period, which is a common fiscal policy to encourage capital investment and business growth.
2464
An asset costing $60,000 is depreciated at 25% per annum using the reducing balance method. What is the depreciation expense for the second year?
In the first year, depreciation is 25% of $60,000 = $15,000. The book value at the end of year one is $60,000 - $15,000 = $45,000. In the second year, depreciation is 25% of the new book value ($45,000), which equals $11,250.
2465
What is another common name for the diminishing balance method of depreciation?
The diminishing balance method, also known as the reducing balance method or written down value method, applies a constant rate of depreciation to the book value of an asset. This results in higher depreciation charges in the early years of an asset's life and lower charges in later years.
2466
An asset was acquired on January 1, 20X3, for £5,500. Using the reducing balance method at a rate of 20% per annum, what is the net book value as of December 31, 20X5?
To calculate the book value after three years: Year 1: £5,500 * 0.8 = £4,400. Year 2: £4,400 * 0.8 = £3,520. Year 3: £3,520 * 0.8 = £2,816. The reducing balance method applies the depreciation rate to the remaining book value each year, resulting in a final book value of £2,816 after three full years of depreciation.
2467
Which statement is true regarding the Written Down Value (WDV) method of depreciation?
Under the Written Down Value method, a constant percentage rate is applied to the book value of the asset at the beginning of each year. Because the book value decreases annually, the absolute amount of depreciation charged also decreases year after year. The rate remains constant, but the depreciation expense declines over time.
2468
What is another common term used for the reducing installment method of depreciation?
The reducing installment method, also known as the diminishing balance method, is widely referred to as the Written Down Value (WDV) method. Under this approach, depreciation is calculated on the book value of the asset at the beginning of each year, which decreases over time.
2469
Under the diminishing balance method, how is depreciation calculated?
The diminishing balance method (or written down value method) applies a fixed depreciation rate to the asset's carrying amount or book value at the beginning of each period. Since the book value decreases annually, the depreciation charge also decreases over time.
2470
How does the annual depreciation charge behave over time under the diminishing balance method?
Under the diminishing balance method (also known as the written down value method), depreciation is calculated on the book value of the asset at the beginning of each year. Since the book value decreases annually due to accumulated depreciation, the resulting depreciation charge also decreases each year, reflecting the asset's declining utility.
