First, we will start with annual depreciation. We will always use straight-line depreciation in this course Consider a firm that
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Answer:
B) A gain would be less or a loss would be greater using straight-line depreciation.
Explanation:
In straight line method of depreciation there is a fixed amount of depreciation, and in double declining method the rate is double of straight line method,
Let us take an example,
Cost of asset = $500,000
Selling price at end of 2nd year = $300,000
Straight line depreciation = $100,000 for each year i.e. $500,000/5
Double declining method rate = ($100,000/$500,000) 100
2 = 40%
Therefore value at end of second year
Straight line = $500,000 - ($100,000 2 ) = $300,000
Double Declining method = ($500,000 -40%) - 40% = $180,000
In case of sale at $300,000
Profit shall be
Straight line = $300,000 - $300,000 = 0
Double Declining = $300,000 - $180,000 = $120,000
Now, there will be more profit in double declining that is gain is less in straight line and losses would be greater in straight line thus statement B is correct.