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CSEET · Fundamentals of Accounting · Depreciation and Amortization

A company proposes to charge depreciation on a machine in proportion to the revenue earned from goods it produces each year. Under AS 10, this method is:

A revenue-based depreciation method is not appropriate under AS 10. Revenue reflects other inputs, selling activities, volumes and prices, including inflation, rather than how the asset's economic benefits are consumed. The standard gives no exception even when prices are stable.

  1. AAppropriate because revenue measures usage exactly
  2. BAppropriate only when prices are stable
  3. CNot appropriate because revenue reflects factors other than consumption of the asset's economic benefitsCorrect
  4. DRequired for all machines producing saleable goods

Explanation

AS 10 says a depreciation method based on revenue generated by an activity using the asset is not appropriate. Revenue is affected by other inputs, selling activities, sales volumes and prices, including inflation, which have no bearing on how the asset is consumed. The stable-price option is wrong as the standard gives no such exception.

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