Question 1

Use the information below to answer the following questions:
Plant Hire Ltd has been in business for one year. The company makes it a practice to capitalise a portion of its advertising costs as a ‘deferred asset’ and to amortise them at 25% per annum. The accountant has suggested to the general manager that the policy of capitalising advertising should be ended because the economic benefit of the expenditures is not clearly determinable. The amount of advertising capitalised this year was $100 000. 
-What effect would such a policy change have on cash flow from operations?

Accepted Answer

Capitalizing advertising costs does not affect cash flow from operations; it only affects the presentation in the financial statements. The cash outflow for advertising has already occurred, so changing the policy would not impact cash flow.

Question 2

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on the following?
-Depreciation expense:

Accepted Answer

If Trainer Ltd changes from the reducing balance method to the straight-line method, there would be a reduction in depreciation expense. The reduction can be calculated as follows:

Reduction in depreciation expense = Depreciation expense under reducing balance method - Depreciation expense under straight-line method 
= $1,020,000 - $680,000 
= $340,000 reduction

Therefore, the best choice would be C, as it represents the correct reduction in depreciation expense if Trainer Ltd changes from the reducing balance method to the straight-line method.

Question 3

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on the following?
-Changing the period of amortisation does NOT affect:

Accepted Answer

Changing the method of depreciation affects net profit, income tax liability, and amortisation expense, but it does not affect cash flow from operations, as depreciation is a non-cash expense.

Question 4

Question Mark Ltd has an income tax rate of 30%. The company makes it a practice to capitalise a portion of its research and development costs as a ‘deferred asset’ and to amortise them at 20% p.a. The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable. The amount of research and development capitalised this year was $180 000. What effect would such policy change have on the following?
-Net profit after tax:

Accepted Answer

The answer of Question Mark Ltd has an income tax...

Question 5

See-Saw Ltd uses moving weighted average for its inventory,which is valued at $276 000.It is considering a change to FIFO,which would decrease the valuation to $245 000.Which of the following would be increased by the change?

Accepted Answer

The change from moving weighted average to FIFO would decrease the valuation of inventory by $31,000, which means it would reduce the cost of goods sold by the same amount. Therefore, the cost of goods sold for the period would be lower, resulting in a higher gross profit and ultimately higher retained profits. Income tax payable and sales are not directly affected by the change in valuation method.

Question 6

Question Mark Ltd has an income tax rate of 30%. The company makes it a practice to capitalise a portion of its research and development costs as a ‘deferred asset’ and to amortise them at 20% p.a. The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable. The amount of research and development capitalised this year was $180 000. What effect would such policy change have on the following?
-Assets:

Accepted Answer

If the policy of capitalising research and development costs is discontinued, the deferred asset of $180,000 will need to be written off immediately, reducing assets. The amount by which the assets are reduced will be the total capitalized R&D cost, which is $180,000, less the portion of the asset amortized in the current year, which is $36,000 (20% x $180,000). Therefore, the assets will be reduced by $144,000 ($180,000 - $36,000).

Question 7

See-Saw Ltd uses moving weighted average for its inventory,which is valued at $276 000.It is considering a change to FIFO,which would decrease the valuation to $245 000.Which of the following would be decreased by the change?

Accepted Answer

Switching from moving weighted average to FIFO would decrease the inventory valuation, which would increase the cost of goods sold and subsequently decrease the net profit.

Question 8

Which of the following would be increased by accounting policy change involving use of the reducing balance method of depreciation in place of the straight-line method,leading to an increase in depreciation expense?

Accepted Answer

The reducing balance method of depreciation charges a higher amount of depreciation expense in the earlier years of an asset's useful life, resulting in a larger expense and thus a lower net profit. This change in accounting policy will increase expenses due to higher depreciation expense every year, leading to a decrease in net profit. Therefore, option D is the correct choice.

Question 9

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 depreciation expense if the reducing balance method were used rather than the straight-line method?

Accepted Answer

The reducing balance method would result in a higher depreciation expense in the first year than the straight-line method. The difference between the two methods is $1,125,000 - $750,000 = $375,000.

Question 10

Changing the rate of depreciation affects:

Accepted Answer

Changing the rate of depreciation affects net profit, as it directly impacts the amount of expenses recognized on the income statement. A higher depreciation rate reduces net profit, while a lower rate increases net profit. The change does not affect cash or other working capital accounts directly.

Question 11

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?

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.

Question 12

Use the information below to answer the following questions:
Plant Hire Ltd has been in business for one year. The company makes it a practice to capitalise a portion of its advertising costs as a ‘deferred asset’ and to amortise them at 25% per annum. The accountant has suggested to the general manager that the policy of capitalising advertising should be ended because the economic benefit of the expenditures is not clearly determinable. The amount of advertising capitalised this year was $100 000. 
-What effect would such a policy change have on net profit before tax?

Accepted Answer

If the company stops capitalizing advertising costs, the entire $100,000 would be expensed immediately, rather than amortizing $25,000. This results in a $75,000 reduction in net profit before tax ($100,000 - $25,000).

Question 13

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on the following?
-Cash from operations:

Accepted Answer

Depreciation is a non-cash expense, so changing the method of depreciation does not affect cash from operations.

Question 14

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on the following?
-Net book value of assets:

Accepted Answer

Switching to the straight-line method would decrease the depreciation expense by $340,000 ($1,020,000 - $680,000), resulting in a $340,000 increase in the net book value of assets.

Question 15

Changing the rate of depreciation does NOT affect:

Accepted Answer

Changing the rate of depreciation does not affect cash as it is a non-cash expense. However, changing the rate of depreciation will affect the net book value of noncurrent assets, net profit, and retained profits as they are all impacted by the amount of depreciation expense recognized.

Question 16

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 net profit after tax if the reducing balance method were used rather than the straight-line method?

Accepted Answer

Using the reducing balance method results in a higher depreciation expense of $1,125,000 compared to $750,000 with the straight-line method. The difference is $375,000. With a 40% tax rate, the tax saving is $150,000 (40% of $375,000), leading to a net profit reduction of $225,000.

Question 17

Which of the following would be increased by an accounting policy change involving transfer from retained profits to general reserve?

Accepted Answer

Transferring from retained profits to general reserve is an internal reallocation within shareholders' equity and does not affect net profit.

Question 18

Swing Ltd uses FIFO for its inventory,which is valued at $21 000.It is considering a change to moving weighted average,which would change the valuation of inventory to $22 500.Which of the following would be decreased by the change?

Accepted Answer

FIFO assumes that the earliest items purchased are sold first, so the cost of goods sold (COGS) is based on the cost of the earliest inventory items. Moving weighted average incorporates the cost of all inventory purchases, so the average cost per unit may be higher or lower than the cost of the earliest inventory items. In this case, the change to moving weighted average results in a higher valuation of inventory, which means that the cost of goods sold would decrease in order to maintain the gross profit margin. Therefore, the correct answer is A) cost of goods sold.

Question 19

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 cash from operations if the reducing balance method were used rather than the straight-line method?

Accepted Answer

The answer of Use the information below to answer the...

Quiz 16: Accounting Policy Choices