Use the information below to answer the following questions:
Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance, with the agreement of its auditors and taxation authorities. As a result, its annual depreciation expense increases by $200,000. The company’s income tax rate is 40%.
-What is the effect on ROE?
A) It increases.
B) It decreases.
C) It's not effected.
D) It cannot be determined from the information provided.

Question

Use the information below to answer the following questions:
Unstable Ltd has decided to change its depreciation method from straight-line to reducing balance, with the agreement of its auditors and taxation authorities. As a result, its annual depreciation expense increases by $200,000. The company’s income tax rate is 40%. 
-What is the effect on ROE?
A) It increases.
B) It decreases.
C) It's not effected.
D) It cannot be determined from the information provided.

Quizplus · Accepted Answer

The change in depreciation method from straight-line to reducing balance results in an increase in annual depreciation expense by $200,000. This will reduce the company's net income and ultimately decrease the ROE. Therefore, the correct answer is B- it decreases.

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