Company A uses an accelerated amortization 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 amortization method results in higher depreciation expense in the early years and lower depreciation expense towards the end of the asset's life. This higher depreciation expense will lead to lower net income for Company A in the early years but higher net income towards the end of the asset's useful life. On the other hand, straight-line method yields the same depreciation expense every year, resulting in higher net income in the early years for Company B and lower net income towards the end of the asset's useful life. Therefore, Option C is the correct answer.

Company a Uses an Accelerated Amortization Method While Company B