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.Other things being equal,which of the following is true?
A)Company A will have higher net income in the early years but Company B will have higher net income towards the end of the asset's useful life.
B)Company A will consistently have the larger net income until residual value is reached.
C)Company B will have higher net income in the early years but Company A will have higher net income towards the end of the asset's useful life.
D)Company B will consistently have the larger net income until residual value is reached.

Question

Quizplus · Accepted Answer

Accelerated depreciation method results in higher depreciation expense in the early years of an asset's life and lower depreciation expense towards the end. This leads to higher expenses and lower net income in the early years for Company A. On the other hand, straight-line depreciation method charges the same amount of depreciation expense each year, resulting in a consistent net income for Company B over the life of the asset. However, towards the end of the asset's useful life, the asset's book value will be low, resulting in lower depreciation expense for Company A and higher net income compared to Company B. Therefore, Company B will have higher net income in the early years but Company A will have higher net income towards the end of the asset's useful life.

Company a Uses an Accelerated Depreciation Method While Company B