Depreciation Methods: Master the Basics for Engineering Economics

Question 1

In engineering economics, what is the primary purpose of depreciation?

Accepted Answer

Distributing the cost of an asset over its useful life

Answer

Lowering tax liabilities

Answer

Showing an asset's decreasing market value

Answer

Providing funds to replace capital assets

Question 2

Which depreciation method results in the highest depreciation expense in the first year of an asset's life?

Accepted Answer

Declining balance method (double-declining balance)

Answer

Straight-line method

Answer

Sum-of-the-years'-digits method

Question 3

The salvage value of an asset represents:

Accepted Answer

The estimated market value of the asset at the end of its useful life

Answer

The original cost of the asset

Answer

The accumulated depreciation of the asset

Question 4

The formula used to calculate depreciation expense under the straight-line method is:

Accepted Answer

(Cost - Salvage value) / Useful life

Answer

(Cost - Accumulated depreciation) / Remaining useful life

Answer

(Book value - Salvage value) / Useful life

Question 5

The book value of an asset is calculated as:

Accepted Answer

Original cost of the asset minus accumulated depreciation

Answer

Market value of the asset

Answer

Salvage value of the asset

Question 6

Which method of depreciation results in a consistent depreciation expense throughout the asset's useful life?

Accepted Answer

Straight-line method

Answer

Declining balance method

Answer

Units-of-production method

Question 7

The primary purpose of depreciation is to:

Accepted Answer

Distribute the cost of an asset over its useful life

Answer

Maximize tax deductions in the early years of asset use

Answer

Estimate the market value of the asset

Question 8

An asset with a salvage value of $0 at the end of its useful life will experience its highest depreciation expense in its:

Accepted Answer

First year

Answer

Last year

Answer

Middle year

Question 9

How does the selection of a depreciation method influence the calculation of both annual depreciation expense and accumulated depreciation?

Accepted Answer

It affects both the annual depreciation expense and the accumulated depreciation throughout the asset's useful life.

Answer

It only impacts the annual depreciation expense, leaving the accumulated depreciation unchanged.

Answer

It solely affects the accumulated depreciation, with no impact on the annual depreciation expense.

Answer

It has no influence on either the annual depreciation expense or the accumulated depreciation.

Question 10

Express the formula used to calculate depreciation expense using the straight-line method.

Accepted Answer

(Cost of asset - Salvage value) / Useful life

Answer

(Cost of asset + Salvage value) / Useful life

Answer

Salvage value / Useful life

Question 11

Which statement about depreciation is incorrect?

Accepted Answer

Depreciation increases the cash flow of a company.

Answer

Depreciation is a process of allocating the cost of an asset over its useful life.

Answer

Depreciation reduces the carrying value of an asset on the balance sheet.

Answer

Depreciation is a tax-deductible expense.

Question 12

Which depreciation method results in a uniform depreciation expense throughout the asset's useful life?

Accepted Answer

Straight-line

Answer

Declining balance

Answer

Sum-of-the-years'-digits

Question 13

What is the main purpose of depreciation?

Accepted Answer

To reflect the decline in value of an asset

Answer

To reduce the taxable income of a company

Answer

To provide a source of funds for replacing assets

Answer

To comply with accounting standards

Question 14

An engineering firm plans to acquire a new machine that will likely be used consistently over its lifespan. Which depreciation method is most suitable for this asset?

Accepted Answer

Straight-line method

Answer

Declining balance method

Answer

Sum-of-the-years'-digits method

Question 15

How does the choice of depreciation method impact a project's cash flow and internal rate of return (IRR)?

Accepted Answer

Declining balance depreciation increases cash flow in early years, resulting in a higher IRR.

Answer

Straight-line depreciation leads to a higher IRR because it spreads depreciation evenly over the asset's life.

Answer

Sum-of-the-years'-digits depreciation does not affect cash flow or IRR, as it allocates depreciation evenly over the asset's life.

Question 16

What is the formula used to calculate depreciation expense under the straight-line method?

Accepted Answer

(Asset Cost - Salvage Value) / Useful Life

Answer

(Asset Cost / Useful Life) - Salvage Value

Answer

(Asset Cost + Salvage Value) / Useful Life

Answer

Useful Life / (Asset Cost + Salvage Value)

Question 17

What is the fundamental purpose of depreciation in accounting?

Accepted Answer

To allocate the cost of an asset over its useful life for financial reporting purposes.

Answer

To reduce the taxable income of a company.

Answer

To increase the value of an asset.

Question 18

Which depreciation method is predominantly used by businesses due to its simplicity and consistent depreciation allocation?

Accepted Answer

Straight-Line

Answer

Double Declining Balance

Answer

Sum-of-the-Years'-Digits

Answer

Declining Balance

Question 19

What is the term used to describe the estimated value of an asset at the end of its useful life?

Accepted Answer

Salvage Value

Answer

Depreciation Expense

Answer

Asset Cost

Question 20

Which depreciation method results in a consistent amount of depreciation expense recognized throughout an asset's useful life?

Accepted Answer

Straight-Line

Answer

Double Declining Balance

Answer

Sum-of-the-Years'-Digits

Answer

Declining Balance

Question 21

What is the term for the difference between the asset's cost and its accumulated depreciation?

Accepted Answer

Book Value

Answer

Useful Life

Answer

Salvage Value

Answer

Depreciation Expense

Question 22

What is the primary advantage of using the sum-of-the-years'-digits depreciation method?

Accepted Answer

It allocates a larger portion of depreciation expense to the early years of an asset's useful life.

Answer

It is the most straightforward depreciation method to calculate.

Answer

It provides the most accurate estimate of an asset's depreciation.

Question 23

Depreciation is a process that:

Accepted Answer

Allocates the cost of an asset over its useful life

Answer

Reduces the tax liability of a company

Answer

Increases the value of an asset over time

Question 24

The depreciation rate for the declining balance method is:

Accepted Answer

Double the Straight-Line Rate

Answer

Units of Activity Rate

Answer

Sum-of-the-Years'-Digits Rate

Answer

Straight-Line Rate

Question 25

Which depreciation method allocates the most significant portion of an asset's cost in the early years of its useful life?

Accepted Answer

Declining balance

Answer

Straight-line

Answer

Sum-of-the-years'-digits

Question 26

Determine the formula used to calculate depreciation expense based on the straight-line method.

Accepted Answer

(Cost - Salvage value) / Useful life

Answer

(Cost + Salvage value) / Useful life

Answer

(Cost + Salvage value) * Useful life

Question 27

Which of the following is not considered an underlying assumption of the declining balance depreciation method?

Accepted Answer

The asset's useful life remains consistent

Answer

The asset's value decreases exponentially

Answer

The asset's salvage value is assumed to be zero

Question 28

Which depreciation method is best suited for assets with a relatively stable value over their useful life?

Accepted Answer

Straight-line

Answer

Sum-of-the-years'-digits

Answer

Units-of-production

Question 29

State the primary purpose of depreciation calculations.

Accepted Answer

To distribute the cost of an asset over its useful life

Answer

To determine the asset's salvage value

Question 30

Identify a qualitative factor to consider when selecting a depreciation method.

Accepted Answer

The anticipated pattern of asset usage

Answer

The useful life of the asset

Answer

The cost of the asset

Question 31

What is the primary advantage of employing the units-of-production depreciation method?

Accepted Answer

It aligns depreciation expense with the level of asset utilization

Answer

It is simple to calculate

Answer

It results in faster depreciation in the initial years of asset life

Question 32

Which of the following is not a recognized method of assigning depreciation costs to periods?

Accepted Answer

Sinking fund

Answer

Sum-of-the-years'-digits

Answer

Declining balance

Question 33

Which depreciation method results in a constant depreciation expense over the asset's useful life?

Accepted Answer

Straight-line depreciation

Answer

Declining balance depreciation

Answer

Sum-of-the-years'-digits depreciation

Answer

Units-of-production depreciation

Question 34

Under the declining balance depreciation method, the depreciation rate is:

Accepted Answer

Higher in the early years

Answer

Constant

Answer

Lower in the early years

Answer

Varies based on usage

Question 35

What is the salvage value of an asset?

Accepted Answer

The estimated value of the asset at the end of its useful life

Answer

The initial cost of the asset

Answer

The depreciated value of the asset

Question 36

What is the main purpose of depreciation?

Accepted Answer

To allocate the cost of an asset over its useful life

Answer

To calculate the profit or loss on the sale of an asset

Answer

To determine the tax liability of a company

Question 37

What is the double-declining balance depreciation rate?

Accepted Answer

Twice the straight-line depreciation rate

Answer

Equal to the sum-of-the-years'-digits depreciation rate

Answer

Half the straight-line depreciation rate

Answer

Dependent on the expected pattern of asset usage

Question 38

Which of the following depreciation methods results in a decreasing annual depreciation charge throughout the asset's useful life?

Accepted Answer

Declining balance method

Answer

Unit-of-production method

Answer

Straight-line method

Answer

Sum-of-the-years'-digits method

Question 39

An asset costing $10,000 has an estimated salvage value of $1,000 at the end of its 5-year useful life. Using the straight-line method, what is the annual depreciation expense?

Accepted Answer

$1,800

Answer

$2,500

Answer

$2,000

Answer

$1,000

Question 40

Which of the following is an advantage of using the declining balance method?

Accepted Answer

Accelerated depreciation in the early years of the asset's life

Answer

Simplicity of calculations

Answer

Provides for a higher salvage value

Question 41

The sum-of-the-years'-digits method of depreciation assigns a higher depreciation expense to:

Accepted Answer

Earlier years of the asset's life

Answer

Later years of the asset's life

Answer

The midpoint of the asset's life

Answer

An equal amount to each year of the asset's life

Question 42

An asset has a cost of $20,000, an estimated salvage value of $2,000, and a useful life of 4 years. What is the annual depreciation expense using the double-declining balance method?

Accepted Answer

$9,600

Answer

$10,000

Answer

$5,000

Answer

$12,000

Question 43

Which of the following factors is NOT considered when selecting a depreciation method?

Accepted Answer

Management preferences

Answer

Asset's salvage value

Answer

Asset's useful life

Answer

Tax regulations

Question 44

The process of allocating the cost of an asset over its useful life is known as:

Accepted Answer

Depreciation

Answer

Expensed

Answer

Depletion

Answer

Amortization

Question 45

Which of the following methods of depreciation is most commonly used for financial reporting purposes?

Accepted Answer

Straight-line method

Answer

Declining balance method

Answer

Units-of-production method

Answer

Sum-of-the-years'-digits method

Question 46

In the context of depreciation, the term 'salvage value' refers to:

Accepted Answer

The estimated value of the asset at the end of its useful life

Answer

The difference between the cost and the salvage value of the asset

Answer

The cost of acquiring the asset

Question 47

Which of the following is a potential drawback of using accelerated depreciation methods?

Accepted Answer

Lower net income in the later years of the asset's life

Answer

Higher depreciation expense in the early years of the asset's life

Answer

Provides a more accurate representation of the asset's decline in value

Question 48

A piece of equipment costing $100,000 has an estimated useful life of 10 years and a salvage value of $10,000. What is the annual depreciation expense using the straight-line method?

Accepted Answer

$9,000

Answer

$11,000

Answer

$12,000

Answer

$10,000

Question 49

Which depreciation method results in the highest depreciation expense in the early years of an asset's life?

Accepted Answer

Double-declining balance method

Answer

Sum-of-the-years'-digits method

Answer

Straight-line method

Answer

Units of production method

Question 50

A machine purchased for $50,000 has a salvage value of $5,000 and a useful life of 5 years. What is the depreciation expense for the second year using the sum-of-the-years'-digits method?

Accepted Answer

$10,000

Answer

$8,000

Answer

$7,000

Answer

$9,000

Question 51

Which of the following factors is NOT considered when determining depreciation expense?

Accepted Answer

Market value of the asset

Answer

Cost of the asset

Answer

Estimated useful life

Answer

Salvage value

Question 52

A company uses the double-declining balance method for depreciation. The asset has a cost of $80,000, a salvage value of $8,000, and a useful life of 5 years. What is the depreciation expense for the third year?

Accepted Answer

$9,600

Answer

$19,200

Answer

$12,800

Answer

$16,000

Question 53

The declining balance method of depreciation is best suited for assets that:

Accepted Answer

Experience a higher rate of obsolescence or wear and tear in the early years.

Answer

Are used for a specific number of units of production.

Answer

Have a consistent rate of depreciation over their useful life.

Question 54

What is the primary purpose of depreciation?

Accepted Answer

To allocate the cost of an asset over its useful life.

Answer

To determine the market value of an asset.

Answer

To track the physical wear and tear of an asset.

Question 55

A company uses the units of production method to depreciate its equipment. The equipment has a cost of $60,000, a salvage value of $6,000, and an estimated production capacity of 100,000 units. If the equipment produced 20,000 units in the first year, what is the depreciation expense for that year?

Accepted Answer

$10,800

Answer

$12,000

Answer

$13,200

Question 56

Which of the following statements is TRUE about depreciation?

Accepted Answer

Depreciation does not affect the cash flow of a company.

Answer

Depreciation is a cash expense.

Answer

Depreciation is a way to increase the book value of an asset.

Question 57

A company is considering purchasing a new piece of equipment. Which depreciation method should they choose if they want to minimize their tax liability in the early years of the asset's life?

Accepted Answer

Double-declining balance method

Answer

Sum-of-the-years'-digits method

Answer

Units of production method

Answer

Straight-line method