Which of the following statements is correct?
A)Companies will change the method of depreciating assets from one year to the next to reflect usage of an asset.
B)Companies can maximize net income in the first year of an asset's life by selecting the double-declining-balance method rather than the straight-line depreciation method.
C)Companies can use one method of depreciation for some of their long-lived productive assets but then use a different method for another group or type of long-lived productive assets.
D)Companies can minimize an asset's book value in the first year of use by selecting the straight-line depreciation method rather than the double-declining-balance method.

Question

Quizplus · Accepted Answer

Companies can use different methods of depreciation for different groups or type of long-lived productive assets. This is because different assets may have different patterns of usage and wear and tear, which may require different methods of depreciation to reflect the economic reality of the situation. For example, a company might use the straight-line method for buildings and the units-of-production method for machinery, based on the respective estimated useful lives and expected usage. However, companies cannot change the method of depreciation from one year to the next to reflect usage of an asset (choice A) because depreciation is based on estimates of the asset's useful life and salvage value, which are determined at the time of acquisition and cannot be changed retroactively. Similarly, companies cannot maximize net income in the first year of an asset's life by selecting the double-declining-balance method (choice B) because the total amount of depreciation over the asset's life is the same for both methods, only the timing of the depreciation is different. Finally, companies cannot minimize an asset's book value in the first year of use by selecting the straight-line depreciation method rather than the double-declining-balance method (choice D) because the book value is simply the original cost of the asset minus its accumulated depreciation, which will be the same total amount regardless of which method is used.

Which of the Following Statements Is Correct