Estimating Practice Exam

In the context of depreciation, which method sees annual depreciation amounts decline as the asset gets older?

1. Straight-line

2. Declining-balance

3. Units of production

4. Fixed-rate

The correct answer is: Declining-balance

The declining-balance method is designed such that the annual depreciation expense is greater in the earlier years of the asset's life and decreases over time. This is because it applies a fixed percentage to the asset's book value at the beginning of each year, which is a declining amount as the asset depreciates. As a result, the depreciation expense decreases each year reflecting the principle that the asset is losing its value at a decreasing rate as it ages. In contrast, the straight-line method spreads the depreciation equally over the asset's useful life, resulting in constant annual depreciation amounts. The units of production method allocates depreciation based on the asset's usage or production level, which can vary and does not necessarily result in a systematic decline each year. The fixed-rate option is not a recognized method of depreciation in accounting, making it irrelevant in this context. Hence, the declining-balance method is the only one that sees depreciation amounts decline as the asset gets older.