Use the Information Below to Answer the Following Questions

question 5

Multiple Choice

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?

• A) There would be a $375 000 reduction.
• B) There would be a $225 000 reduction.
• C) There would be a $150 000 reduction.
• D) There would be no effect.

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Definitions:

Debits Equal Credits

A fundamental concept in double-entry bookkeeping, stating that for every financial transaction, debits must equal credits.

Main Purpose

The primary aim or objective that an organization or activity is designed to achieve.

Trial Balance

An accounting report listing all the balances in each general ledger account at a point in time, used to verify the accuracy of bookkeeping entries.

Balance

The amount of money present in an account or the difference between the total debits and credits in an account.