AFC Depreciation and Amortization 1 — Questions and Answers
Question 1: Which depreciation method applies a constant rate to the declining book value of an asset each period?
- Straight-line method
- Double-declining balance method (Correct answer)
- Units of production method
- Sum-of-years-digits method
Correct answer: Double-declining balance method
The double-declining balance method applies a fixed rate (typically twice the straight-line rate) to the asset's book value at the start of each period, resulting in higher depreciation in early years.
Question 2: An asset costs $50,000, has a salvage value of $5,000, and a useful life of 5 years. What is the annual straight-line depreciation?
- $10,000
- $9,000 (Correct answer)
- $11,000
- $8,000
Correct answer: $9,000
Straight-line depreciation = (Cost − Salvage Value) / Useful Life = ($50,000 − $5,000) / 5 = $9,000 per year.
Question 3: Which term describes the systematic allocation of an intangible asset's cost over its useful life?
- Depreciation
- Depletion
- Amortization (Correct answer)
- Impairment
Correct answer: Amortization
Amortization is the process of spreading the cost of an intangible asset (such as a patent or copyright) over its estimated useful life.
Question 4: What is the book value of a depreciable asset?
- Original cost minus accumulated depreciation (Correct answer)
- Replacement cost minus salvage value
- Market value minus accumulated amortization
- Original cost plus salvage value
Correct answer: Original cost minus accumulated depreciation
Book value equals the asset's original cost less all accumulated depreciation recorded to date, representing its net carrying amount on the balance sheet.
Question 5: The units of production depreciation method bases the depreciation charge on:
- Equal amounts each calendar year
- Actual usage or output of the asset (Correct answer)
- A declining percentage of book value
- The asset's market value
Correct answer: Actual usage or output of the asset
The units of production method allocates depreciation based on actual activity—such as units manufactured or hours used—making it ideal for assets whose wear is directly tied to use.
Question 6: What is salvage value in the context of depreciation?
- The initial purchase price of the asset
- The estimated residual value at the end of the asset's useful life (Correct answer)
- The market value of the asset during its productive life
- The replacement cost of the asset when fully depreciated
Correct answer: The estimated residual value at the end of the asset's useful life
Salvage value is the estimated amount an asset will be worth (or sold for) at the end of its useful life, and it is subtracted from original cost to determine depreciable cost.
Question 7: Which of the following is NOT a recognized depreciation method under GAAP?
- Straight-line
- Double-declining balance
- Perpetual inventory (Correct answer)
- Sum-of-years-digits
Correct answer: Perpetual inventory
Perpetual inventory is an inventory tracking system, not a depreciation method; GAAP-recognized depreciation methods include straight-line, declining balance, sum-of-years-digits, and units of production.
AFC Depreciation and Amortization 1
Which depreciation method applies a constant rate to the declining book value of an asset each period?