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

Which of the following is a recognised cause of depreciation of a fixed asset arising from the passage of time and legal limits, rather than from physical use?

Expiry of the lease or patent period is a cause of depreciation, because the asset's legal life runs out with time. Market price movements, falling profits and customer credit terms do not reduce the asset's useful life and are not recognised causes of depreciation.

  1. AExpiry of the lease or patent periodCorrect
  2. BFluctuation in the market price of the asset
  3. CFall in the profits of the business
  4. DIncrease in the credit period allowed to customers

Explanation

Depreciation arises from wear and tear, obsolescence, effluxion of time and legal expiry. A lease or patent that expires loses its value as its legal life runs out, so depreciation (amortisation) is charged. Market price swings and profit changes are not causes of depreciation.

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