Future Business Leaders of America (FBLA) Accounting Practice Test

Which method of depreciation results in greater expense recorded in earlier years?

1. Straight-line method of depreciation

2. Sum-of-the-years' digits method

3. Declining-balance method of depreciation

4. Units of production method

The correct answer is: Declining-balance method of depreciation

The declining-balance method of depreciation results in greater expense recorded in the earlier years of an asset's useful life because it applies a fixed percentage to the asset's book value at the beginning of each period. This percentage remains constant, leading to a higher depreciation expense in the initial years when the asset's book value is higher. As the asset ages, its book value decreases, resulting in a lower depreciation expense in subsequent periods. This accelerated depreciation reflects the reality that many assets lose value more quickly in their earlier years, making this method particularly useful for tax purposes or for assets that experience significant improvements and innovations quickly. In contrast, the straight-line method spreads the expense evenly over the asset's useful life, while the sum-of-the-years' digits method, although also front-loaded, does so in a manner that is less aggressive than the declining-balance method. The units of production method ties depreciation expenses directly to the usage of the asset, which can result in varying expenses that do not necessarily favor earlier years specifically.