Which depreciation method uses a fixed percentage of the asset's carrying amount?

Which depreciation method uses a fixed percentage of the asset's carrying amount?

• A. Straight Line method
• B. Diminishing (Reducing) Balance method
• C. Units of Output method
• D. Accelerated depreciation by index method

Answer: (B)

The depreciation method that applies a constant rate to the asset’s carrying amount each year is the diminishing (reducing) balance method. In this approach you multiply the asset’s carrying amount (net book value) by a fixed percentage annually, so the depreciation charge is larger in early years when the carrying amount is higher and becomes smaller over time as the asset’s value declines. This contrasts with straight-line depreciation, which charges the same amount each year, or with methods tied to usage (units of production) or to inflation/index adjustments, which don’t use a fixed percentage of the carrying amount every year. For example, with a cost of 20,000 and a 20% rate, Year 1 depreciation is 4,000 and the carrying amount drops to 16,000; Year 2 depreciation is 3,200, and so on, continuing until the asset reaches its residual value.

The depreciation method that applies a constant rate to the asset’s carrying amount each year is the diminishing (reducing) balance method. In this approach you multiply the asset’s carrying amount (net book value) by a fixed percentage annually, so the depreciation charge is larger in early years when the carrying amount is higher and becomes smaller over time as the asset’s value declines. This contrasts with straight-line depreciation, which charges the same amount each year, or with methods tied to usage (units of production) or to inflation/index adjustments, which don’t use a fixed percentage of the carrying amount every year. For example, with a cost of 20,000 and a 20% rate, Year 1 depreciation is 4,000 and the carrying amount drops to 16,000; Year 2 depreciation is 3,200, and so on, continuing until the asset reaches its residual value.