Which method of depreciation results in higher depreciation expense in the early years of an asset's life?
Correct Answer
C) Declining balance method
The declining balance method is an accelerated depreciation method that results in higher depreciation expenses in the early years of an asset's useful life. Straight-line method spreads depreciation evenly over the asset's life.
Why This Is the Correct Answer
The declining balance method is an accelerated depreciation method that applies a fixed percentage rate to the asset's remaining book value each year. Since the book value is highest in the first year, the depreciation expense is also highest in the first year and decreases each subsequent year. This front-loads the depreciation expense, making it significantly higher in the early years compared to other methods. This method is commonly used for assets that lose value quickly or become obsolete rapidly.
Why the Other Options Are Wrong
Option A: Straight-line method
The straight-line method spreads depreciation evenly across all years of the asset's useful life, resulting in the same depreciation expense each year rather than higher expenses in early years.
Option B: Units of production method
The units of production method bases depreciation on actual usage rather than time, so depreciation expense varies with production levels and doesn't necessarily result in higher early-year expenses.
Option D: Sum-of-years digits method
While sum-of-years digits is also an accelerated method that does result in higher early-year depreciation, the declining balance method typically produces even higher depreciation in the earliest years, making it the most accurate answer.
Memory Technique
Think 'Declining Balance = Declining amounts each year = Started HIGH and goes down' - the word 'declining' tells you it starts at its highest point.
Reference Hint
Look up depreciation methods in the accounting or business management section, typically found in chapters covering asset management or financial accounting principles.
More Business & Finance Questions
A contractor's license expires on March 31st. If they submit a renewal application on April 15th, what additional requirement must be met under Florida regulations?
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
In Florida, what is the minimum workers' compensation insurance coverage required for construction companies with employees?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
People Also Study
Previous Question
A contractor receives a material invoice for $25,000 with terms of 2/10 net 30. If paid within 10 days, what is the net amount due?
Next Question
A piece of equipment costs $85,000 with a 5-year useful life and $5,000 salvage value. Using straight-line depreciation, what is the annual depreciation expense?