The correct answer is: B. Sinking fund method.
The sinking fund method is a depreciation method that assumes that a sinking fund is established in which funds will accumulate for replacement purposes. The annual depreciation expense is calculated as the difference between the cost of the asset and the estimated salvage value, divided by the estimated useful life of the asset. The depreciation expense is then deposited into a sinking fund, which is invested at a specified rate of return. The funds in the sinking fund are used to replace the asset at the end of its useful life.
The sinking fund method is a conservative method of depreciation because it takes into account the cost of replacing the asset. However, it is also a more complex method of depreciation because it requires the calculation of the sinking fund balance and the investment rate of return.
The other options are incorrect because they do not assume that a sinking fund is established.
- The straight line method is a depreciation method that assumes that the asset will be used evenly over its useful life. The annual depreciation expense is calculated as the cost of the asset divided by its estimated useful life.
- The sum-of-the-years-digits method is a depreciation method that assumes that the asset will be used more heavily in the early years of its useful life. The annual depreciation expense is calculated as the sum of the digits from 1 to the estimated useful life of the asset, divided by the sum of the digits from 1 to the remaining useful life of the asset.
- The declining balance method is a depreciation method that assumes that the asset will be used more heavily in the early years of its useful life. The annual depreciation expense is calculated as a percentage of the book value of the asset, where the percentage is determined by a declining balance factor.