Question

Question 8 Not yet answered Marked out of 1.00 Paterson 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 $1125 000 The company's income tax rate is 40%. 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? Flag Question Select one: O a. There would be a $375 000 reduction O b. There would be no effect. O c. There would be a $225 000 reduction O d. None of the options O e. There would be a $150 000 reduction Question 9 Not yet answered Marked out of 100 Prag Cherry Rentals 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 annum. The accountant has suggested to the general manager that the policy of capitalising advertising should be ended 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? Question Select one: O a. There would be a $45 000 reduction O b. There would be a $75 000 reduction O c. There would be a $30 000 reduction O d. There would be no effect. O e. There would be a $5 000 reduction

Answer 1

Question 8

Correct answer is

a. There would be a $375,000 reduction

Working : Depreciation as per straight line =$750,000

Depreciation as per reducing balance =$1125,000

If reducing balance method would have been used , excess deoreciation would have been charged by $375,000 which means net book value would have reduced by $375,000

Question 9

Correct answer is

b. There would be a $75,000 reduction

Working :

Before change in policy, expense to be charged = $100,000*25% =$25,000

After change in policy , expense to be charged =$100,000

There would be increase in expense by $75,000

This means net profit before tax would decrease by $75,000.