Company A uses an accelerated depreciation method while Company B uses the straight-line method for an asset of the same cost and useful life.Which of the following statements is correct?
A) Company A will have higher depreciation expense in the early years, but Company B will have the higher expense towards the end of the asset's useful life.
B) Company A will consistently have higher depreciation expense until residual value is reached.
C) Company B will have higher depreciation expense in the early years, but Company A will have the higher expense towards the end of the asset's useful life.
D) Company B will consistently have higher depreciation expense until residual value is reached.

Question

Quizplus · Accepted Answer

Accelerated depreciation methods, such as double-declining balance or sum-of-the-years'-digits, result in higher depreciation expenses in the early years of an asset's useful life compared to the straight-line method. This is because accelerated depreciation methods assign a higher percentage of the asset's cost to depreciation in the earlier years, reflecting the idea that the asset will likely be more productive in those years compared to later years. On the other hand, the straight-line method assigns the same amount of depreciation expense each year over the asset's useful life. Therefore, Company A will have higher depreciation expenses in the early years, and Company B will have a consistent amount of depreciation expense each year. However, towards the end of the asset's useful life, Company B will have a higher depreciation expense because they have not been accelerating the expense throughout the asset's life.

Company a Uses an Accelerated Depreciation Method While Company B