Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes.If it used straight-line,the depreciation expense for the first year would be $750 000,but if it used reducing balance at the rate allowable for taxation purposes,the expense would be $1 125 000.The company's income tax rate is 30 per cent.
-What would be the effect on the net book value of assets if the reducing balance method were used rather than the straight-line method?

Question

Quizplus · Accepted Answer

Using the reducing balance method would result in a higher depreciation expense ($1,125,000) compared to the straight-line method ($750,000), leading to a greater reduction in the net book value of assets by the difference of $375,000.

Pottery Ltd Is Trying to Decide Whether to Use Straight-Line