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

question 34

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 the net book value of assets if the reducing balance method were used rather than the straight-line method?

• A) There would be a $375 000 reduction.
• B) There would be a $262 500 reduction.
• C) There would be a $150 000 reduction.
• D) There would be no effect.

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Definitions:

Cash-Flow Projections

Estimates of a company's future financial liquidity over a specific period, accounting for incoming and outgoing cash.

First Year

Pertains to the initial period of time, typically referring to the first 12 months, in various contexts such as a company's operations, an educational program, or an individual's experience in a new role.

Business

Business refers to the organized efforts and activities of individuals to produce and sell goods and services for profit.

Balance Sheet

A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a snapshot of its financial condition.