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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Under the straight line method of depreciation, which statement is correct?

Under straight line, the annual depreciation charge is constant across the asset's life when cost, residual value and useful life stay unchanged. The depreciable amount is allocated equally. A declining charge on written down value belongs to the diminishing balance method instead.

  1. AThe depreciation charge decreases each year as book value falls
  2. BThe depreciation charge is the same every year over the asset's life, assuming cost, residual value and life do not changeCorrect
  3. CThe asset's book value can never reach its residual value
  4. DThe rate of depreciation is applied to the written down value each year

Explanation

Straight line spreads the depreciable amount equally over useful life, so the annual charge is constant. Declining charges and rates applied to written down value describe the diminishing balance method.

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