Depreciation Methods Questions and Answers

Answer: C

Correct answer: 2100

The gain is the excess of the proceeds over the book value, and only that gain is taxed: \[ (32\,000 - 25\,000) \times 0.30 = 7000 \times 0.30 = 2100. \] Taxing the whole proceeds would give 9600, and taxing the book value 7500; both appear as distractors, and both mistake what is actually taxable.

Answer: D

A sale at 18 000 against a book value of 25 000 gives a deductible loss of 7000, worth 2100 at a 30 per cent rate, so the firm is 20 100 better off in cash. The gain case works the same way in reverse, the tax reducing the proceeds.

Answer: A

Correct answer: 15 000

The saving is the charge multiplied by the tax rate: \[ 50\,000 \times 0.30 = 15\,000. \] This is the only route by which depreciation affects cash at all - no money moves when the charge is made, but 15 000 less is paid to the tax authority than would otherwise have been.

Answer: B

Dividing the 12 million of cost by the 3 million tonnes of recoverable reserve gives 4 a tonne. Extracting 400 000 tonnes in a year would give a depletion allowance of 1.6 million, and revising the reserve estimate would revise the rate.

Answer: C

Correct answer: 1-Q, 2-R, 3-P

Three shapes of charge. Straight line is constant, dividing the base equally across the years. Sum of years digits falls by equal steps, the fractions counting down from n over the sum to one over the sum. And the sinking fund method rises, since the early amounts have longer to earn interest and less needs to be set aside then.

Answer: D

Correct answer: 1-Q, 2-P, 3-R

Three write-offs for three situations. Depreciation covers a physical asset losing value through wear or obsolescence. Depletion covers a natural resource being exhausted as it is extracted. And the service output method is the form of depreciation used where the loss follows the units produced rather than the years elapsed.

Answer: A

Correct answer: 2, 3, 1

For a five-year asset with no salvage, double declining balance takes 40 per cent of the cost in the first year, sum of years digits takes 5/15 or 33.3 per cent, and straight line takes 20 per cent. The order is the same for any life, since the double declining rate is always twice the straight line rate and the sum of years digits fraction always falls between them.

Answer: B

Correct answer: 1 and 2 only are correct

Statements 1 and 2 are correct: depreciation moves no cash, and declining balance applies its rate to the book value without deducting salvage. Statement 3 is the essential point about method choice - the total written off is the depreciable base whatever method is used, and only the timing differs.

Answer: C

Correct answer: switching from straight line to sum of years digits

A change of method redistributes the same total across the years; it cannot alter the total, which is the first cost less the salvage value. The other three all change that total directly: a different first cost, a different salvage value, or a shorter life over which the same base must be written off.

Answer: D

The sinking fund method charges least in the early years and most at the end, on the supposition of a fund earning interest, so it is the opposite of accelerated. The other three all front-load the write-off deliberately.