Inventory & Depreciation
Depreciation Methods
Calculating expenses via Straight-line, MACRS, or Sum of Year's Digits.
Questions provide asset cost, salvage value, useful life, and sometimes a purchase date mid-year. SYD and straight-line are tested quantitatively; MACRS is tested conceptually (classification and method description). Error-detection questions describe a wrong method and ask for the over/understatement impact.
What the exam tests
Definition-to-Term Identification
Match a description to the correct method (e.g., 'assets divided into classes with set depreciation years' = MACRS, the Modified Accelerated Cost Recovery System).
Standard Straight-Line Calculation
Apply the formula: (Cost − Salvage Value) ÷ Useful Life = Annual Depreciation Expense.
Accumulated Depreciation and Book Value
Calculate total accumulated depreciation after N years, or Book Value = Original Cost − Accumulated Depreciation.
Sum of Year's Digits (SYD) Application
Two-step: (1) SYD = n(n+1) ÷ 2; (2) Year 1 expense = Depreciable Base × (n ÷ SYD); Year 2 = Depreciable Base × ((n−1) ÷ SYD); and so on.
Partial-Year Adjustments
Asset purchased mid-period: calculate full-year depreciation, then multiply by the fraction of the year held (e.g., July 1 purchase = 6/12 = half-year expense).
Journal Entry Construction
Record depreciation: Debit Depreciation Expense, Credit Accumulated Depreciation.
Error Identification and Analysis
A scenario describes using the wrong depreciation method; identify the financial statement impact or the correcting entry required.
Multi-Step Procedural Logic
Key rules
- ›Straight-Line: Depreciable Base = Cost − Salvage Value → Annual Expense = Base ÷ Useful Life.
- ›SYD: Step 1: SYD = n(n+1) ÷ 2. Step 2: Year k fraction = (n − k + 1) ÷ SYD. Step 3: Expense = Depreciable Base × fraction.
- ›MACRS: use the assigned asset class life and the IRS percentage table. No salvage value is deducted.
- ›Partial year: multiply the full-year expense by the months-held fraction before recording.
Common traps
- !Applying the full-year SYD or straight-line expense when the asset was purchased mid-year.
Algebraic Application
Key rules
- ›To find Salvage Value: Salvage = Cost − (Annual Expense × Useful Life).
- ›To find Useful Life: Useful Life = Depreciable Base ÷ Annual Expense.
- ›Isolate the unknown by treating the depreciation formula as an algebra equation.
Common traps
- !Solving for salvage value using accumulated depreciation instead of annual expense × useful life.
Debit/Credit Logic (Contra-Asset)
Key rules
- ›Accumulated Depreciation is a contra-asset. Its normal balance is Credit.
- ›Each period: Debit Depreciation Expense (income statement), Credit Accumulated Depreciation (balance sheet).
- ›Book Value = Cost − Accumulated Depreciation (never negative; stop at salvage value for straight-line).
Common traps
- !Debiting Accumulated Depreciation when recording depreciation expense. It is credited.
Arithmetical Accuracy
Key rules
- ›Carry full decimal values through intermediate steps before rounding at the final answer.
- ›Verify: sum of all SYD yearly expenses over the asset's life must equal the Depreciable Base.
Common traps
- !Rounding intermediate SYD fractions, which causes the total to not equal the depreciable base.
Interpretive Data Reading
Key rules
- ›Extract: asset cost, salvage (residual) value, useful life in years, and purchase date.
- ›Ignore product descriptions or business context that does not contribute a variable to the formula.
Common traps
- !Using useful life in months instead of years in the straight-line formula.
Try one
Which depreciation method requires assets to be divided into specific classes, each with a set number of years over which the asset is depreciated?
MACRS sorts assets into IRS classes (3-year, 5-year, 7-year, etc.), each with a prescribed recovery period and percentage table. The other methods do not assign class lives.
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