How is the recovery period of an asset determined when using the straight-line depreciation method?

• A. It is always set at 5 years for all assets.
• B. It is determined by the amount of cash generated by the asset each year.
• C. It is based on the estimated useful life of the asset as determined by management or accounting standards.
• D. It is equal to the time it takes for the asset's market value to reach zero.

Answer: (C)

Verified step by step guidance

1. Understand the concept of straight-line depreciation: This method allocates the cost of an asset evenly over its useful life. The recovery period is the time span over which the asset's cost is depreciated.
2. Recognize that the recovery period is based on the estimated useful life of the asset. This is determined by management or accounting standards, considering factors such as the asset's expected usage, wear and tear, and obsolescence.
3. Note that the recovery period is not universally set at 5 years for all assets. Different assets have different useful lives depending on their nature and purpose.
4. Understand that the recovery period is not determined by the amount of cash generated by the asset each year. Depreciation is a non-cash expense and does not directly relate to cash flow.
5. Clarify that the recovery period is not equal to the time it takes for the asset's market value to reach zero. Depreciation is based on the asset's cost and useful life, not its market value.