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

Which statement about depreciation under the diminishing balance method is correct?

Under the diminishing balance method, the depreciation charge is highest in the first year and falls in later years. This is because a fixed percentage is applied to the reducing book value, not the original cost. A constant charge belongs to the straight line method.

  1. AThe depreciation charge is the same every year
  2. BThe depreciation charge is highest in the first year and declines in later yearsCorrect
  3. CThe book value of the asset becomes zero after its useful life
  4. DThe rate is applied on original cost every year

Explanation

The rate is applied to the opening book value, which falls each year, so the charge is highest in year 1 and declines. A constant charge on original cost is straight line. The book value never reaches exactly zero because a fixed percentage of a reducing balance is charged.

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