Multiple Choice
In the context of depreciation, the depreciable cost of an asset is calculated as:
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8. Long Lived Assets
Depreciation: Summary of Main Methods
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following is a commonly used method for calculating depreciation?
A
LIFO method
B
Straight-line method
C
Units-of-production method
D
FIFO method
Verified step by step guidance1
Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It reflects the wear and tear or obsolescence of the asset over time.
Identify commonly used methods for calculating depreciation: The most widely used methods include the Straight-line method, Units-of-production method, and Declining balance method. These methods differ in how they allocate the cost of the asset over time.
Clarify why LIFO (Last-In, First-Out) and FIFO (First-In, First-Out) are not depreciation methods: LIFO and FIFO are inventory valuation methods used to determine the cost of goods sold and ending inventory, not for calculating depreciation.
Explain the Straight-line method: This method allocates an equal amount of depreciation expense each year over the asset's useful life. The formula is: \( \text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Useful Life}} \).
Explain the Units-of-production method: This method calculates depreciation based on the asset's usage or production. The formula is: \( \text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Total Estimated Units of Production}} \times \text{Units Produced in the Period} \).
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