Pottery Ltd Is Trying to Decide Whether to Use Straight-Line

question 3

Multiple Choice

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 30 per cent.
-What would be the effect on net profit after tax if the reducing balance method were used rather than the straight-line method?

• A) There would be a $375 000 increase.
• B) There would be a $375 000 reduction.
• C) There would be a $262 500 increase.
• D) There would be a $262 500 reduction.

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Definitions:

Particular Purpose

A specific objective or requirement for which goods or services are intended or needed, as expressed in a contract.

Lessee

A person or entity who leases or rents property from another, known as the lessor.

Merchant

A merchant is an individual or company involved in the wholesale or retail trade of goods or services.

Sale

The transaction between a buyer and a seller in which the ownership of goods is transferred in exchange for payment.