Question 3 The CEO of Herald Corporation hasasked you to help him describe the e

Question

Question 3

The CEO of Herald Corporation hasasked you to help him describe the effects of differentdepreciation methods. Herald
recently purchased a new machine with a capitalized cost of$500,000. The machine has an expected life of 5 years and
a zero residual value. Select the best response from those belowregarding depreciation for this asset.

(a) if we choose double decliningbalance depreciation rather than straight-line, depreciationexpense in the first
two years of this asset's life will be lower

(b) if we choose double decliningbalance depreciation rather than straight-line depreciation, totalassets will be
greater at the end of each of the first two years of this asset'slife

(c) if we choose double decliningbalance depreciation rather than straight-line, net income for thefirst two years
of this asset's life will be lower

(d) more than one of the abovestatements are correct

(e) all of the above statements arecorrect

(f) none of the above statementsare correct

Question 3

Explanation / Answer

C. if we choose double declining balance depreciation rather thanstraight line , net income for the first two years of this asset'slife will be lower. Explanation Double declining balance gives the highest amount for depreciationexpense. So, it reduces the net income. In this case , straight line percentage is 100/5 = 20%. Double declining % is 20* 2 = 40 % , so the net income will bereduced for 2 yrs. And after 2 yrs of depreciation ( 40 +40) , theasset value is equal to 20 % of its original value and the straightline % is also the same.

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