Manotik in Motion has recently expanded their operation and had built a large manufacturing facility and head office complex on the outskirts of Ottawa.To finance the expansion, they have taken out a loan with the Canadian Bank of Royal.The loan has a covenant stating that they must not exceed a certain debt-to-assets ratio.Management is now selecting the depreciation policies they will use on all the assets bought as part of the expansion.Which of the following will best help them meet their debt covenant?

Question

Quizplus · Accepted Answer

Straight-line depreciation results in a constant expense over the useful life of an asset, which will help keep the debt-to-assets ratio consistent. Declining balance depreciation and units-of-production depreciation can result in larger expenses in earlier years and smaller expenses in later years, which could potentially impact the debt-to-assets ratio. Expensing all interest costs during the construction period would not have an impact on the depreciation policies chosen for the assets, and may not necessarily help meet the debt covenant.

Manotik in Motion Has Recently Expanded Their Operation and Had