The CEO of Herald Corporation has asked you to help him describe the effects of

Question

The CEO of Herald Corporation has asked you to help him describe the effects of different depreciation methods. Herald
recently purchased a new machine with a capitalized cost of $500,000. The machine has an expected life of 5 years with
no expected salvage value. Select the best response from those below regarding the depreciation for this asset.
A)
if we choose double declining balance depreciation rather than straight-line, depreciation expense in the first two
years of this asset's life will be lower
B)
if we choose double declining balance depreciation rather than straight-line, net income for the first two years of
this asset's life will be lower
C)
if we choose double declining balance depreciation rather than straight-line depreciation, total assets will be
greater at the end of each of the first two years of this asset's life
D)
two of the above statements are correct
E)
all of the above statements are correct
F)
none of the above statements are correct

Explanation / Answer

b. if we choose double declining balance depreciation rather than straight-line, net income for the first two years of this asset's life will be lower Double declining balance gives the highest amount for depreciationexpense. So, it reduces the net income. In this case , straight line percentage is 100/5 = 20%. Double declining % is 20* 2 = 40 % , so the net income will be reduced for 2 yrs. And after 2 yrs of depreciation ( 40 +40) , the asset value is equal to 20 % of its original value and the straight line % is also the same.

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