[amp_mcq option1=”sinking fund depreciation” option2=”straight line depreciation” option3=”reducing balances depreciation” option4=”none of the above” correct=”option4″]
The correct answer is: D. none of the above
Annual depreciation of the plant is not proportional to the earning capacity of the plant. In fact, it is not proportional to anything. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It is not a measure of the asset’s value or its earning capacity.
Sinking fund depreciation is a method of depreciation in which a fixed amount is set aside each year to fund the replacement of the asset at the end of its useful life. Straight line depreciation is a method of depreciation in which an equal amount is deducted from the asset’s book value each year. Reducing balance depreciation is a method of depreciation in which a higher amount is deducted from the asset’s book value in the early years of its life and a lower amount is deducted in the later years.
None of these methods of depreciation is based on the asset’s earning capacity.