Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance.As a result,its annual depreciation expense increases by $200 000.The company's income tax rate is 30 per cent.
-What is the effect on ROA,which was 20 per cent prior to the change?
A) It increases.
B) It decreases.
C) There is no effect.
D) It cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

The change in depreciation method from straight-line to reducing balance increases the annual depreciation expense by $200,000. This increase in expense would decrease the company's net income by $200,000 before taxes. After taxes, the decrease in net income would be $140,000 ($200,000 x 0.70). Since ROA is calculated as net income divided by total assets, the decrease in net income would reduce ROA, thereby decreasing it. Therefore, the correct choice is B, which states that it decreases.

Unstable Ltd Has Decided to Change Its Depreciation Method from Straight-Line