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The MCQs below are drawn from the Accountancy & Auditing subject category.
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2481
Which depreciation method allows the book value of an asset to be reduced to zero?
Under the Written Down Value (WDV) method, depreciation is calculated on the diminishing balance of the asset. While mathematically it approaches zero asymptotically, in accounting practice, it is often cited in contexts where the asset value is significantly reduced over time compared to other methods. Note: Strictly speaking, WDV rarely hits absolute zero, but it is the standard answer in many academic contexts.
2482
Which depreciation method allocates the cost of an asset in equal amounts over its entire useful economic life?
The straight-line method is the simplest and most common way to calculate depreciation. It assumes that the asset provides an equal amount of utility in each year of its life. By subtracting the estimated salvage value from the cost and dividing by the useful life, a constant annual depreciation expense is determined.
2483
A computer network costing $100,000 is depreciated using the straight-line method at 25% per annum with no residual value. What is the net book value after three years?
Annual depreciation is 25% of $100,000, which is $25,000. Over three years, total accumulated depreciation is $25,000 * 3 = $75,000. The net book value is the original cost minus accumulated depreciation: $100,000 - $75,000 = $25,000.
2484
A vehicle was acquired for $5,500 with an estimated residual value of $500. If the monthly depreciation expense is $100 using the straight-line method, what is the annual rate of depreciation?
Annual depreciation is $1,200 ($100 x 12 months). The depreciable amount is $5,000 ($5,500 - $500). The annual rate is calculated as (Annual Depreciation / Depreciable Amount), which is $1,200 / $5,000 = 0.24 or 24%.
2485
A vehicle is purchased for $6,000 with an estimated useful life of 5 years and a residual value of $1,000. Calculate the annual depreciation expense using the straight-line method.
The straight-line method of depreciation is calculated by subtracting the residual value from the cost of the asset and dividing the result by the useful life. Here, ($6,000 - $1,000) / 5 years = $5,000 / 5 = $1,000 per year. This method allocates an equal amount of depreciation expense to each year of the asset's useful life, ensuring a consistent reduction in the book value of the asset over time.
2486
A company calculated depreciation at 25% on a straight-line basis instead of 30% on a reducing balance basis for an asset costing $45,000 with $13,500 accumulated depreciation. How does this error affect the net profit?
Under the reducing balance method, depreciation would be 30% of ($45,000 - $13,500) = $9,450. Under the straight-line method, it is 25% of $45,000 = $11,250. The difference is $1,800. Since the recorded expense ($11,250) is higher than the correct expense ($9,450), the net profit is understated by $1,800.
2487
Which depreciation method results in higher reported profits during the earlier years of an asset's useful life?
The straight-line method spreads the cost of an asset evenly over its useful life. In contrast, accelerated methods like the written down value method charge higher depreciation in early years, reducing early profits. Thus, the straight-line method results in higher profits in the initial years compared to accelerated methods.
2488
Under the straight-line method of depreciation, how does the annual depreciation expense behave over the useful life of the asset?
The straight-line method allocates the cost of a tangible asset evenly over its useful life. By subtracting the salvage value from the cost and dividing by the number of years, the resulting annual depreciation charge remains the same for every period, assuming no changes in the asset's estimated life or salvage value.
2489
A vehicle purchased for 200,000 is sold for 140,000 after two years. Using the Straight-Line Method (SLM) at 10% per annum, what is the profit or loss on the sale?
Under the Straight-Line Method, depreciation is 20,000 per year (10% of 200,000). Over two years, total depreciation is 40,000. The book value at the time of sale is 160,000 (200,000 - 40,000). Selling the asset for 140,000 results in a loss of 20,000 (160,000 - 140,000).
2490
Under the fixed installment method, how is the annual depreciation charge calculated?
The fixed installment method, also known as the Straight Line Method, calculates depreciation by applying a constant percentage to the original cost of the asset. This ensures that the depreciation expense remains uniform throughout the useful life of the asset, assuming no major additions or disposals occur during that period.
