Depreciation

Question 1

What is depreciation?

Answer 1

Concept which allows for the fact a fixed assets into cash will be less value overtime.

Question 2

How do you calculate net book value?

Answer 2

Cost - amount written off (as it wears out)

Question 3

What is accumulated depreciation?

Answer 3

Total depreciation over previous years.

Question 4

What is residual value?

Answer 4

Value of asset at end of its life.

Question 5

What is historic cost?

Answer 5

Initial cost of asset.

Question 6

What is the calculation for straight line method of depreciation?

Answer 6

Initial cost - (residual value - life of asset)

Question 7

What is straight line depreciation?

Answer 7

A simple accounting technique that allocates an assets cost evenly over its useful life.

Question 8

What are the advantages and disadvantages of straight line depreciation?

Answer 8

Advantages:
- amount of depreciation lower in first few years.
- lower level of depreciation, suggests value of business higher.
- less deducted for depreciation, profit higher.

Disadvantages:
- estimate residual value (difficult to measure).
- assumes life of assets known.
- lower depreciation in first years could be misleading.

Question 9

What is the reducing (declining) balance of depreciation?

Answer 9

Constant % rate of depreciation each year.

Question 10

What are the advantages and disadvantages of reducing balance depreciation?

Answer 10

Advantages:
- more realistic for early years.
- no estimate for residual value.

Disadvantages:
- higher level of depreciation at start means value of assets lower.
- lower value of assets, harder to borrow against assets.