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

Which of the following best describes the relationship between an asset's estimated residual value and the total amount of depreciation recorded over its service life?

The total depreciation equals the asset's cost plus its estimated residual value.

The total depreciation equals the asset's cost minus its estimated residual value.

The total depreciation is independent of the asset's estimated residual value.

The total depreciation is always equal to the asset's cost.

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Verified step by step guidance

Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It reflects the reduction in the asset's value due to usage, wear and tear, or obsolescence.

Define residual value: Residual value (also known as salvage value) is the estimated amount that an asset will be worth at the end of its useful life. It is subtracted from the asset's cost to determine the total depreciable amount.

Calculate total depreciation: The formula for total depreciation is: Total Depreciation = Asset's Cost - Estimated Residual Value. This represents the amount of the asset's cost that will be allocated as depreciation over its service life.

Clarify the relationship: The total depreciation recorded over the asset's service life is directly dependent on the estimated residual value. A higher residual value reduces the total depreciation, while a lower residual value increases it.

Evaluate the options: Based on the formula and relationship, the correct description is: 'The total depreciation equals the asset's cost minus its estimated residual value.' This aligns with the standard accounting principle for calculating depreciation.