Question

What is the effect of an asset's service life on depreciation cost?

1) Depreciation cost is higher in the early years and lower in the later years
2) Depreciation cost is lower in the early years and higher in the later years
3) Depreciation cost remains constant throughout the asset's service life
4) Depreciation cost varies randomly throughout the asset's service life

Answer 1

The correct answer is 3) Depreciation cost remains constant throughout the asset's service life, assuming straight-line depreciation is used. Depreciation is an accounting method for allocating the cost of a tangible asset over its useful life, which is crucial for business investment strategies and financial assets.

Step-by-step explanation:

The effect of an asset's service life on depreciation cost depends on the method of depreciation being used. Generally, if we consider straight-line depreciation, the depreciation cost remains constant throughout the asset's service life. This means that the correct answer to the student's question is: 3) Depreciation cost remains constant throughout the asset's service life. Depreciation is a way of allocating the cost of a tangible asset over its useful life. In a scenario where durable goods and lifetime warranties become popular, and items are designed to facilitate upgrade or repair, the concept of depreciation is significant as it helps businesses understand and predict the value and cost of their assets over time, ensuring that they make informed financial decisions. Different depreciation methods can impact financial statements differently and affect investment strategies and the management of financial assets.

The effect of an asset's service life on depreciation cost is that the depreciation cost is lower in the early years and higher in the later years. When an asset is first acquired, it loses more value in terms of depreciation in the early years due to wear and tear, or other factors. As the asset ages, its value decreases at a slower rate, resulting in lower depreciation costs. This pattern is commonly known as the declining balance method of depreciation. For example, let's say a company buys a machine that will last for 10 years. In the first year, the depreciation expense may be higher, covering a larger portion of the machine's initial cost. However, in the later years, the depreciation expense will be lower as the machine's value declines at a slower rate.