AFC Depreciation and Amortization 2 — Questions and Answers
Question 1: For an asset with a 4-year useful life, what is the sum of years digits used in the sum-of-years-digits depreciation method?
- 6
- 8
- 10 (Correct answer)
- 12
Correct answer: 10
The sum of years digits for a 4-year life is 1 + 2 + 3 + 4 = 10, which becomes the denominator in calculating each year's depreciation fraction.
Question 2: Under the double-declining balance method, the depreciation rate applied to book value is:
- The straight-line rate
- Twice the straight-line rate (Correct answer)
- Half the straight-line rate
- Three times the straight-line rate
Correct answer: Twice the straight-line rate
The double-declining balance rate is calculated as (1 / useful life) × 2, making it exactly twice the equivalent straight-line rate.
Question 3: Which type of long-term asset is subject to depletion rather than depreciation?
- Buildings
- Office equipment
- Natural resources such as oil or timber (Correct answer)
- Patents
Correct answer: Natural resources such as oil or timber
Depletion is used to allocate the cost of natural resources (such as oil, gas, coal, or timber) as they are extracted or harvested over time.
Question 4: When an asset is fully depreciated, its book value equals:
- Zero
- Its original cost
- Its salvage value (Correct answer)
- Its replacement cost
Correct answer: Its salvage value
Depreciation stops when the book value equals the salvage value; a fully depreciated asset carries a book value equal to its estimated salvage value.
Question 5: How is depreciation expense classified on the income statement?
- A cash expense that reduces net income
- A non-cash expense that reduces net income (Correct answer)
- A variable expense tied to revenue
- A direct production cost only
Correct answer: A non-cash expense that reduces net income
Depreciation is a non-cash expense because it reduces net income without involving an actual cash outflow during the period it is recorded.
Question 6: Which account is credited when recording a period's depreciation expense?
- Depreciation Expense
- The asset account directly
- Accumulated Depreciation (Correct answer)
- Cash
Correct answer: Accumulated Depreciation
The journal entry to record depreciation debits Depreciation Expense and credits Accumulated Depreciation, a contra-asset account that offsets the asset's original cost on the balance sheet.
Question 7: An asset has an original cost of $80,000, a salvage value of $8,000, and a useful life of 8 years. What is the straight-line depreciation rate?
- 10%
- 12.5% (Correct answer)
- 15%
- 8%
Correct answer: 12.5%
The straight-line rate is 1 / useful life = 1 / 8 = 12.5%, which is then applied to the depreciable cost each year.
AFC Depreciation and Amortization 2
For an asset with a 4-year useful life, what is the sum of years digits used in the sum-of-years-digits depreciation method?