Question

Which of the following depreciation methods uses book value to determine annual depreciation?

1) Straight Line
2) Units of Production
3) Sum of the year's digits
4) Declining-balance

Answer 1

The declining-balance method uses book value to determine annual depreciation.

Step-by-step explanation:

Out of the four depreciation methods listed, the Declining-balance method uses book value to determine annual depreciation.

Under this method, the depreciation expense is calculated by applying a fixed rate to the book value of the asset. The rate is typically higher than the straight-line method and decreases each year. This means that the asset depreciates more in the earlier years and less in the later years.

For example, let's say you have a piece of equipment with a book value of $10,000. If the declining-balance rate is 20%, the first-year depreciation expense would be $2,000 (20% of $10,000), and the second-year depreciation expense would be $1,600 (20% of $8,000, which is the book value after the first year).