Accounting Online Program Certification Practice Test

On what basis was the machine depreciated over its useful life?

1. Declining balance basis

2. Straight-line basis

3. Units of production basis

4. Sum of the years' digits basis

The correct answer is: Straight-line basis

The machine was depreciated using the straight-line basis, which is the most common method for calculating depreciation. This method spreads the cost of the asset evenly over its useful life, making it relatively simple to understand and apply. Each year, the same amount of depreciation expense is recognized until the asset is fully depreciated, which is particularly useful for assets that provide consistent utility over time. This approach is appropriate for many types of machinery and equipment, as it accurately reflects the usage and wear of the asset throughout its lifespan without consideration for fluctuations in productivity or activity levels. It offers predictability in financial reporting and helps businesses manage their expenses effectively. The other methods—declining balance, units of production, and sum of the years' digits—are more complex and might apply in specific circumstances. For instance, declining balance accelerates depreciation in the early years, while units of production ties depreciation to actual usage, and sum of the years' digits emphasizes earlier expense recognition. However, for a straightforward scenario where consistent wear and Tear are expected, the straight-line basis is the most logical choice.