Question
In: Accounting
a firm switches from straight-line to sum of the years digits depreciation in the early years...
a firm switches from straight-line to sum of the years digits depreciation in the early years of an asset's life. Explain clearly which income statement and balance sheet items will be impacted by this switch and why?
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Expert Solution
Answer
If the firm changes its Depreciation policy, then it will affect the Financial Statements of the company.
In Straight line depreciation the depreciation expense is same throughout the Years but in Sum of Years digit method the Depreciation is high is early years and low later.
So if the company switches from straight-line to sum of the years digits depreciation in the early years of an asset's life.
As we know that when we Change the depreciation method, we have to adjust the precious year profit (In which we applied old method) according to New Depreciation method.
The Depreciation in Sum of the years method will be High than in Straight Line Method.
So change will result in More Depreciation expense and increase in Accumulated Depreciation balance.
Increase in Depreciation expense will result in Decrease in Net income of the company and the Retained Earnings balance of the company will also reduce.
So if the Profit decreases then it means that the taxes due will also reduce so this will result in Less taxes
If the Depreciation will increase so the Book Value of the company will also reduce.
These are the Items which will be affected with change in Depreciation policy.
ekkarill92 answered 2 years agoRelated Solutions
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$
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SHOW DETAIL in the Dropbox for this
problem
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