Question

The following table shows the amount of revenue generated by three different companies over a three year period of time.

Company Year 1 Year 2 Year 3
Brown Company 30,000 20,000 10,000
Jones Company 20,000 20,000 20,000
Smith Company 35,000 10,000 15,000
Based on this information alone Brown Company should depreciate its long-term assets using
Multiple Choice
A. straight-line depreciation.
B. double-declining-balance depreciation.
C. units-of-production depreciation.
D. first-in-first-out depreciation.

Answer 1

For Brown Company, straight-line depreciation is the most suitable method for depreciating long-term assets due to the consistent decrease in their annual revenue, which reflects a stable rate of asset usage or decline over time.

Step-by-step explanation:

The provided table showing the revenues of Brown Company over three years indicates a consistently decreasing amount of revenue each year. Considering this pattern, Brown Company should use straight-line depreciation for its long-term assets. This method spreads the cost of the asset evenly over its useful life, reflecting a steady decrease in revenues, which can be seen as an indication of predictable, steady use or decline in asset utility over time. On the contrary, double-declining-balance depreciation accelerates depreciation early on, which may not match Brown's revenue pattern, and units-of-production depreciation ties depreciation to usage, which isn't provided here. Lastly, first-in-first-out depreciation is a term not applicable to depreciation methods as it is related to inventory management, not asset depreciation.