CFA Practice Question

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CFA Practice Question

Which of the following statements is the LEAST ACCURATE regarding accelerated depreciation methods?

A. Accelerated depreciation methods depreciate an asset in proportion to its actual use.
B. Accelerated depreciation compensates for rising repair costs as an asset ages.
C. Accelerated depreciation methods are appropriate if the benefits from using an asset are highest when it is relatively new.
D. Accelerated depreciation methods are often used to reduce the tax burden immediately after an asset is purchased.
Correct Answer: A

A is not correct since the units of production method depreciates assets in proportion to their use, and thus they become a variable cost. Accelerated depreciation reduces the value of an asset by the largest amount in the early years, regardless of when it is getting the most use.

User Contributed Comments 5

User Comment
cfairs Why is B true for accelerated depreciation?
dravinskis cfairs, I think it's because the depreciation expense will be lower in later years so when added to repair expenses, the combined effect would be less than if straight-line was used.
Thediceman I don't understand B neither. With advanced depreciation method, it will be less in the later year, how could this compensate the rising repair cost. So i think it is least accreted.
charliez Thediceman: it just means less depreciation cost but more repair cost, which makes the total cost of maintaining an asset about the same.
farhan92 dont be rebel - follow the instructions that are capitalised!
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