Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

8. Long Lived Assets

Depreciation: Summary of Main Methods

Financial Accounting

8. Long Lived Assets

Depreciation: Summary of Main Methods

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Multiple Choice

Depreciation on the company's equipment for the year is computed to be $5,000. Which of the following methods most likely resulted in this amount if the equipment cost $25,000, has a useful life of 5 years, and no residual value?

Straight-line method

Sum-of-the-years'-digits method

Units-of-production method

Double-declining balance method

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Verified step by step guidance

Understand the concept of depreciation: Depreciation is the allocation of the cost of an asset over its useful life. Different methods of depreciation distribute this cost in varying ways, depending on the method chosen.

Review the straight-line method: This method evenly distributes the depreciation expense over the useful life of the asset. The formula is: $ \text{Annual Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Useful Life}} $. Substitute the values: $ \frac{25,000 - 0}{5} $.

Examine the sum-of-the-years'-digits method: This method accelerates depreciation by assigning higher depreciation in earlier years. The formula involves summing the digits of the useful life (e.g., 5 years: 1+2+3+4+5 = 15) and allocating depreciation based on the fraction of remaining years. For the first year, the fraction would be $ \frac{5}{15} \times 25,000 $.

Consider the units-of-production method: This method bases depreciation on usage or production. You would need information about the total estimated units of production and the actual units produced during the year to calculate depreciation. Without this data, this method cannot be applied here.

Analyze the double-declining balance method: This method accelerates depreciation by applying a fixed percentage (double the straight-line rate) to the book value of the asset at the beginning of each year. The formula is: $ \text{Depreciation Expense} = \text{Book Value} \times \text{Rate} $, where $ \text{Rate} = \frac{2}{\text{Useful Life}} $. For the first year, $ \text{Rate} = \frac{2}{5} $, and $ \text{Depreciation Expense} = 25,000 \times \frac{2}{5} $.