Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

Which of the following represents the basis of plateau accelerated depreciation?

1. Depreciation is spread evenly across the lifetime of the asset

2. Depreciation occurs rapidly in the initial years then levels off

3. Asset retains full value until its final year

4. Depreciation is fixed and does not change over time

The correct answer is: Depreciation occurs rapidly in the initial years then levels off

Plateau accelerated depreciation is characterized by a method where the rate of depreciation is initially high, reflecting a rapid decrease in the asset's value in the early years. This aligns with the principle that assets typically lose more value early in their life due to factors such as obsolescence, higher usage, or wear and tear. As time progresses, the depreciation rate decreases, leveling off to reflect a more stable value for the asset in its later years. This gradual transition leads to a 'plateau' effect in the depreciation expense, which means that while the asset depreciates significantly at first, the amount depreciated each year becomes more stable as the asset ages. This method is distinct from straight-line depreciation, where the expense is evenly distributed throughout the asset's useful life, or fixed depreciation, where the expense does not vary with time. It is also different from scenarios where the asset retains value until the end of its life. This understanding reflects the nature and rationale behind plateau accelerated depreciation, making it the correct answer.