Homework Answers
When a fixed plant asset with 5 year estimated useful life is sold during the second year, the use of an accelerated depriciation method instead of the straight line method leads to INCREASE in the gain and DECREASE in the loss on the sale of fixed plant asset.
Under accelerated depriciation method, the depriciation is charged more in the initial life of an asset, rather than under the straight line depriciation method. When more depreciation is charged, book value of the asset is decreased more. So, on the sale of an asset, the gain difference is more.
For example- Cost of asset = $200000
Depriciation under accelerated depriciation method = $10000
Reduced book value = $200000 - $10000 = $190000
Sale value = $195000
Gain = $195000 - $190000 = $5000
Depriciation under straight line method = $6000
Reduced book value = $200000 - $6000 = $194000
Gain = $195000 - $194000 = $1000
Therefore, the correct answer is option 1st.
Gain - Increase Loss - decrease.
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