Question 1

What factors determine the annual charge for depreciation?

Accepted Answer

The original price of the asset

The estimated useful life of the asset

The estimated scrap or residual value of the asset

The selection of an appropriate method of depreciation, i.e. Straight Line or Reducing Balance method(s)

Question 2

Why does a company charge depreciation in calculating profit

Accepted Answer

Depreciation is charged so as to write off the cost/value of fixed assets over their estimated useful economic life. Depreciation is an expense in the Profit and Loss Account.

Question 3

Why does a company charge depreciation in calculating profit

Accepted Answer

Failure to include depreciation in the final accounts causes the profit to be overstated and the net worth to be overstated. The financial statements would not show a true and fair view of the business.

Question 4

Explain the term 'useful economic life' in relation to fixed assets

Accepted Answer

Useful economic life is the expected period of time during which a fixed asset remains beneficial/useful to the business. It is essentially how long the fixed asset is expected to contribute to generating income before it becomes obsolete or is no longer

Question 5

Explain the term 'useful economic life' in relation to fixed assets

Accepted Answer

useful to the business, then it is said to be past its economic life. For example, a business purchases a Motor Vehicle which can be used for 5 years but has no scrap value at the end of the 5 years. The company will depreciate it by 20% a year over the 5

Question 6

Explain the term 'useful economic life' in relation to fixed assets

Accepted Answer

Year period

Question 7

Explain why a company charges depreciation in calculating profit

Accepted Answer

Depreciation is an expense. Depreciation is charged so as to write off the cost of the fixed asset over its useful economic life. Failure to include depreciation in the final accounts will result in the profit being overstated and the net worth being

Question 8

Explain why a company charges depreciation in calculating profit

Accepted Answer

overstated in the Balance  Sheet and will not show a true and fair view (true value).

Question 9

List the factors that should be considered when determining the depreciation policy fo r a particular asset

Accepted Answer

The factors to be considered when accounting for depreciation are:
 Type of asset
 Estimated life of asset
 Cost of asset
 Scrap value of asset at end of life
 Method of depreciation

Question 10

Explain why a company charges depreciation in calculating profit

Accepted Answer

Depreciation is charged so as to write off the cost of the tangible fixed asset over its useful  economic life. Depreciation is an expense in the Income Statement /Profit and Loss Account.  Failure to include depreciation in the final accounts causes the

Question 11

Explain why a company charges depreciation in calculating profit

Accepted Answer

profit to be overstated 
the net worth to be overstated 
The financial statements would not show a true and fair view of the business

Question 12

Explain what is meant by depreciation

Accepted Answer

Deprecation is the measure of loss in value of a fixed asset over its useful economic life as a result of wear and tear, passage of time, obsolescence and extraction.

Question 13

Distinguish between the straight line method and reducing balance method of depreciation

Accepted Answer

The straight line method is where the same amount of the cost of the asset is written
off each year.  It is appropriate in the case of an asset that remains in the business over
a long period of time and loses value slowly e.g. buildings

Question 14

Distinguish between the straight line method and reducing balance method of depreciation

Accepted Answer

The straight‐line method involves spreading the depreciable amount evenly over the
estimated useful life of the asset.  Using this method, the depreciation is the same
figure each year, which suggests that the asset is being used up at an even rate.

Question 15

Distinguish between the straight line method and reducing balance method of depreciation

Accepted Answer

The reducing balance applies a constant percentage to the gradually carrying amount
balance so that the amount of depreciation expense diminishes over the useful life of
the asset.  The amount written off is high in early years and reduces each year

Question 16

Distinguish between the straight line method and reducing balance method of depreciation

Accepted Answer

This method is appropriate in the case of an asset which loses most of its
value in the years immediately after purchase e.g. vehicles, computer, equipment etc.,
(assets that become obsolete quickly because of changes in technology)

Question 17

Why would a company choose one method of depreciation over another

Accepted Answer

A method of depreciation is chosen by a company because of its policy on depreciation and
ensuring that the consistency concept is applied when preparing accounts. 

Explain both methods

mention the matching concept

Question 18

What factors are taken into account in arriving at the annual depreciation charge

Accepted Answer

Cost of asset
 Estimated life of asset
 Scrap value of asset
 Method of depreciation

Question	Answer
What factors determine the annual charge for depreciation?	The original price of the asset The estimated useful life of the asset The estimated scrap or residual value of the asset The selection of an appropriate method of depreciation, i.e. Straight Line or Reducing Balance method(s)
Why does a company charge depreciation in calculating profit	Depreciation is charged so as to write off the cost/value of fixed assets over their estimated useful economic life. Depreciation is an expense in the Profit and Loss Account.
Why does a company charge depreciation in calculating profit	Failure to include depreciation in the final accounts causes the profit to be overstated and the net worth to be overstated. The financial statements would not show a true and fair view of the business.
Explain the term 'useful economic life' in relation to fixed assets	Useful economic life is the expected period of time during which a fixed asset remains beneficial/useful to the business. It is essentially how long the fixed asset is expected to contribute to generating income before it becomes obsolete or is no longer
Explain the term 'useful economic life' in relation to fixed assets	useful to the business, then it is said to be past its economic life. For example, a business purchases a Motor Vehicle which can be used for 5 years but has no scrap value at the end of the 5 years. The company will depreciate it by 20% a year over the 5
Explain the term 'useful economic life' in relation to fixed assets	Year period
Explain why a company charges depreciation in calculating profit	Depreciation is an expense. Depreciation is charged so as to write off the cost of the fixed asset over its useful economic life. Failure to include depreciation in the final accounts will result in the profit being overstated and the net worth being
Explain why a company charges depreciation in calculating profit	overstated in the Balance Sheet and will not show a true and fair view (true value).
List the factors that should be considered when determining the depreciation policy fo r a particular asset	The factors to be considered when accounting for depreciation are: Type of asset Estimated life of asset Cost of asset Scrap value of asset at end of life Method of depreciation
Explain why a company charges depreciation in calculating profit	Depreciation is charged so as to write off the cost of the tangible fixed asset over its useful economic life. Depreciation is an expense in the Income Statement /Profit and Loss Account. Failure to include depreciation in the final accounts causes the
Explain why a company charges depreciation in calculating profit	profit to be overstated the net worth to be overstated The financial statements would not show a true and fair view of the business
Explain what is meant by depreciation	Deprecation is the measure of loss in value of a fixed asset over its useful economic life as a result of wear and tear, passage of time, obsolescence and extraction.
Distinguish between the straight line method and reducing balance method of depreciation	The straight line method is where the same amount of the cost of the asset is written off each year. It is appropriate in the case of an asset that remains in the business over a long period of time and loses value slowly e.g. buildings
Distinguish between the straight line method and reducing balance method of depreciation	The straight‐line method involves spreading the depreciable amount evenly over the estimated useful life of the asset. Using this method, the depreciation is the same figure each year, which suggests that the asset is being used up at an even rate.
Distinguish between the straight line method and reducing balance method of depreciation	The reducing balance applies a constant percentage to the gradually carrying amount balance so that the amount of depreciation expense diminishes over the useful life of the asset. The amount written off is high in early years and reduces each year
Distinguish between the straight line method and reducing balance method of depreciation	This method is appropriate in the case of an asset which loses most of its value in the years immediately after purchase e.g. vehicles, computer, equipment etc., (assets that become obsolete quickly because of changes in technology)
Why would a company choose one method of depreciation over another	A method of depreciation is chosen by a company because of its policy on depreciation and ensuring that the consistency concept is applied when preparing accounts. Explain both methods mention the matching concept
What factors are taken into account in arriving at the annual depreciation charge	Cost of asset Estimated life of asset Scrap value of asset Method of depreciation

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Depreciation

Theory Questions