CFA Level 1: True Facts about Straight-Line Depreciation

True Facts about Straight-Line Depreciation

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Question

Which of the following is/are true about straight-line depreciation?

I. With constant pre-depreciation income, it leads to an increasing rate of return over time.

II. It ignores loss of productivity and increased maintenance costs over time.

III. It leads to higher taxes in later years compared to accelerated depreciation methods.

Answers

Explanations

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A. B. C. D.

Explanation

With accelerated depreciation methods, the depreciation expense gets lower than that in the case of straight line depreciation, leading to higher taxes in the later years. One of the mathematical facts about straight-line and accelerated depreciation methods is that even when the pre-depreciation income stays constant, the rate of return steadily increases over time purely because of the decrease in asset value.

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