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 ROE?
A) It increases.
B) It decreases.
C) It is not effected.
D) It cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

Changing from a straight-line depreciation method to a reducing balance method would increase the annual depreciation expense, resulting in lower net income. This, in turn, would decrease ROE (return on equity) as it is calculated by dividing net income by shareholders' equity. Therefore, the correct answer is B, it decreases.

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