Question 1

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, which of the following is NOT affected?

Accepted Answer

The answer of Trainer Ltd is trying to decide whether...

Question 2

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?

Accepted Answer

Using the reducing balance method would result in a higher depreciation expense in the first year, which would decrease taxable income and therefore decrease the amount of income tax owed. The difference between the depreciation expense under the two methods is $375,000 ($1,125,000 - $750,000), and the tax rate is 30%, so the tax savings would be $112,500 ($375,000 x 30%). Therefore, the net profit after tax would decrease by $262,500 ($375,000 - $112,500) if the reducing balance method were used instead of the straight-line method.

Question 3

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on cash from operations?

Accepted Answer

Depreciation is a non-cash expense, so changes in the depreciation method do not directly affect cash from operations.

Question 4

Which of the following would be decreased by an accounting policy change involving writing off obsolete inventories?

Accepted Answer

Writing off obsolete inventories would result in a decrease in the value of inventory and a decrease in net profit. This is because the value of inventory on the balance sheet is reduced and the expense for writing off the obsolete inventories is recognized on the income statement, reducing net profit. This accounting policy change would not have an impact on revenue or liabilities.

Question 5

Which of the following would be increased by an accounting policy change involving use of the reducing balance method of depreciation in place of the straight-line method, leading to an increase in depreciation expense?

Accepted Answer

A change in accounting policy from the straight-line method to the reducing balance method will increase the annual depreciation expense charged in the income statement. As depreciation is classified as an expense, the change will increase the expense and reduce profit. Hence, option D is the correct answer. A change in the accounting policy will not impact the level of assets or retained profits as they reflect the historical values and the changes are accounted for retrospectively.

Question 6

See-Saw Ltd uses moving weighted average for its inventory, which is valued at $276 000. It is considering a change to FIFO, which would decrease the valuation to $245 000. Which of the following would be decreased by the change?

Accepted Answer

The answer of See-Saw Ltd uses moving weighted average for...

Question 7

Changing the rate of depreciation affects:

Accepted Answer

Changing the rate of depreciation affects the net profit of a company. Depreciation is a non-cash expense that reduces the value of assets over time, and a higher depreciation rate leads to a lower net profit. Therefore, changing the rate of depreciation can have a significant impact on a company's financial statements and overall profitability.

Question 8

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on net book value of assets?

Accepted Answer

Switching to the straight-line method would result in a lower annual depreciation expense ($680,000 instead of $1,020,000). This means that the net book value of the assets would decrease at a slower rate, leading to a higher net book value compared to using the reducing balance method. The difference in the annual depreciation expense is $340,000, which would not be subtracted from the asset's value under the straight-line method, hence leading to a $340,000 increase in the net book value of assets.

Question 9

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?

Accepted Answer

Using the reducing balance method would result in a higher depreciation expense ($1,125,000) compared to the straight-line method ($750,000), leading to a greater reduction in the net book value of assets by the difference of $375,000.

Question 10

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 depreciation expense if the reducing balance method were used rather than the straight-line method?

Accepted Answer

The reducing balance method would result in a $1,125,000 depreciation expense compared to the $750,000 expense under the straight-line method, which is a $375,000 increase.

Question 11

Plant Hire Ltd has been in business for one year. The company makes it a practice to capitalise a portion of its advertising costs as a 'deferred asset' and to amortise them at 25 per cent per annum. The accountant has suggested to the general manager that the amount should be expensed rather than capitalised because the economic benefit of the expenditures is not clearly determinable. The amount of advertising capitalised this year was $100 000. What effect would such a policy change have on cash flow from operations?

Accepted Answer

Expensing advertising costs instead of capitalizing them affects the income statement by increasing expenses, but it does not affect cash flow from operations because both capitalizing and expensing are non-cash accounting entries.

Question 12

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes. Using the reducing balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it changed to the straight-line method, depreciation expense would be $680 000. If the straight-line method were used instead of the reducing balance method, what would be the effect on depreciation expense?

Accepted Answer

The reducing balance method results in higher depreciation expenses in the earlier years of an asset's life and lower expenses in the later years. In contrast, the straight-line method results in equal depreciation expenses each year.

In this scenario, the reducing balance method results in $1,020,000 of depreciation expense, while the straight-line method results in $680,000 of expense. Therefore, changing to the straight-line method would reduce depreciation expense by $340,000 ($1,020,000 - $680,000).

Therefore, the best choice is answer choice C, as it correctly identifies the reduction in depreciation expense that would result from changing to the straight-line method.

Question 13

See-Saw Ltd uses moving weighted average for its inventory, which is valued at $276 000. It is considering a change to FIFO, which would decrease the valuation to $245 000. Which of the following would be increased by the change?

Accepted Answer

The change from moving weighted average to FIFO would change the cost of goods sold calculation, resulting in a lower valuation of inventory and thus a higher cost of goods sold. This would ultimately increase the cost of goods sold and decrease gross profit, which would in turn decrease net income and retained earnings. Income tax payable would not be directly affected by this change. Sales would also not be affected by this change in inventory valuation method.

Question 14

Which of the following would be increased by an accounting policy change involving transfer from retained profits to general reserve?

Accepted Answer

Transferring from retained profits to general reserve does not increase shareholders' equity, liabilities, or net profit. It is merely a reallocation within equity.

Question 15

Swing Ltd uses FIFO for its inventory, which is valued at $21 000. It is considering a change to moving weighted average, which would change the valuation of inventory to $22 500. Which of the following would be decreased by the change?

Accepted Answer

Changing from FIFO to moving weighted average will result in a higher cost of goods sold, as the weighted average includes the cost of previous inventory purchases. Therefore, the cost of goods sold will decrease with FIFO and increase with moving weighted average.

Question 16

Question Mark Ltd has an income tax rate of 30 per cent. The company makes it a practice to capitalise a portion of its research and development costs as a 'deferred asset' and to amortise them at 20 per cent per annum. The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable. The amount of research and development capitalised this year was $180 000. What effect would such policy change have on net profit after tax?

Accepted Answer

If the policy of capitalizing research and development is discontinued, then the entire amount of $180,000 would be expensed in the current year. This would reduce the profit before tax by $180,000. The tax at 30% would be $54,000, and the remaining amount of $126,000 ($180,000 - $54,000) would be deducted from the profit after tax. Therefore, net profit after tax would be reduced by $100,800 ($126,000 - $25,200 amortization which is 20% of $126,000).

Question 17

Changing the rate of depreciation does NOT affect:

Accepted Answer

Changing the rate of depreciation only affects the net book value of noncurrent assets, net profit, and retained profits. It has no impact on cash, as cash is not a noncurrent asset and is not affected by changes in depreciation rates.

Question 18

Question Mark Ltd has an income tax rate of 30 per cent. The company makes it a practice to capitalise a portion of its research and development costs as a 'deferred asset' and to amortise them at 20 per cent per annum. The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable. The amount of research and development capitalised this year was $180 000. What effect would such policy change have on assets?

Accepted Answer

The answer of Question Mark Ltd has an income tax...

Question 19

Plant Hire Ltd has been in business for one year. The company makes it a practice to capitalise a portion of its advertising costs as a 'deferred asset' and to amortise them at 25 per cent per annum. The accountant has suggested to the general manager that the amount should be expensed rather than capitalised because the economic benefit of the expenditures is not clearly determinable. The amount of advertising capitalised this year was $100 000. What effect would such a policy change have on net profit before tax?

Accepted Answer

The answer of Plant Hire Ltd has been in business...

Quiz 16: Accounting Policy Choices