Canadian Securities Course (CSC) Level 1 Practice Exam

How do you calculate depreciation using the declining balance method?

1. Use a constant percentage applied to the original cost

2. Subtract salvage value from total cost

3. Depreciation is not calculated using this method

4. Add a fixed amount to the remaining balance

The correct answer is: Use a constant percentage applied to the original cost

The declining balance method of depreciation involves applying a constant percentage to the remaining book value of an asset each year. This method results in higher depreciation expenses in the earlier years of an asset's life and gradually decreases over time. Under this method, the asset's initial cost is multiplied by the chosen depreciation rate, which represents a constant percentage. Then, each subsequent year's depreciation expense is calculated based on the asset's current book value after subtracting the accumulated depreciation from previous years. This reflects how the value of the asset declines more rapidly in the early years, which is consistent with many types of assets that lose value quickly. The other options do not accurately describe the declining balance method. One inaccurately suggests subtracting a salvage value, another incorrectly states that depreciation is not calculated using this method, and the last option describes adding a fixed amount rather than applying a percentage.