Use the information below to answer the following questions:
Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes. If it used straight-line, the depreciation expense for the first year would be $750 000, but if it used reducing balance at the rate allowable for taxation purposes, the expense would be $1 125 000. The company’s income tax rate is 40%.
-What would be the effect on the net book value of assets if the reducing balance method were used rather than the straight-line method?

Question

Use the information below to answer the following questions:
Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes. If it used straight-line, the depreciation expense for the first year would be $750 000, but if it used reducing balance at the rate allowable for taxation purposes, the expense would be $1 125 000. The company’s income tax rate is 40%. 
-What would be the effect on the net book value of assets if the reducing balance method were used rather than the straight-line method?

Quizplus · Accepted Answer

The reducing balance method would result in higher depreciation expense, which would reduce the net book value of assets more quickly than the straight-line method. Therefore, the net book value of assets would be reduced by $375 000 if the reducing balance method were used. Overall, it may be beneficial for the company to use the reducing balance method for tax purposes and straight-line for accounting purposes to maximize tax savings while maintaining accurate financial statements.

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