In 2016, East Corporation and South Corporation each paid $100,000 for an asset

Question

In 2016, East Corporation and South Corporation each paid $100,000 for an asset with an expected useful life of 5 years and no salvage value. East Corporation uses the straight-line depreciation method and South Corporation uses the double-declining-balance depreciation method. Assuming that all revenue and other expense items are identical for both companies, which of the following statements is correct for the first year of the equipment's life?

A. Double-declining-balance depreciation provides the lowest depreciation expense and the best return on assets ratio.

B. Straight-line depreciation provides the highest depreciation expense and the best return on assets ratio.

C. Straight-line depreciation provides the lowest depreciation expense and the best return on assets ratio.

D. Double-declining-balance depreciation provides the highest depreciation expense and the best return on assets ratio.

In 2016, East Corporation and South Corporation each paid $100,000 for an asset with an expected useful life of 5 years and no salvage value. East Corporation uses the straight-line depreciation method and South Corporation uses the double-declining-balance depreciation method. Assuming that all revenue and other expense items are identical for both companies, which of the following statements is correct for the first year of the equipment's life?

Explanation / Answer

Answer is C. Straight line depreciation provides the lowest depreciation expense and the bbest return on asset ratio.

Explanation is as folows:

In the first year, double decling method provide the depreciation at double the rate on the same amount as that in SLM. Hence, depreciation under SLM is lower and higher income and higher return on assets.

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