Question
What would you reply to the below text? As stated in the text, depreciation is the process of allocating the cost of a plant asset
What would you reply to the below text?
As stated in the text, depreciation is the process of allocating the cost of a plant asset to expense while it is in use (Wild and Shaw, 2019, p. 364). Wild and Shaw list factors that should be considered as cost, salvage value, useful life, and relationships. There are different depreciation methods straight-line method, units-of-production method, and declining-balance method. Here, the company has always used the straight-line method, but the tax accountant is recommending a switch to the double-declining balance method.
Wild and Shaw (2019) maintain that the declining-balance method, also known as an accelerated depreciation method, has more depreciation during the early years and less in later years. They say it is computed as follows- multiply the asset's beginning of period book value by a depreciation rate (usually twice the straight-line rate) to determine the periods depreciation. If double the straight-line rate is used the method is referred to as double declining-balance. The salvage value is not used in the calculation.
A company is allowed to change the depreciation method, it is known as a change in the accounting estimate of the assets depreciation. Changing the accounting estimate would alter the rate at which the depreciation accumulates and therefore would affect the carrying value of the asset on the balance sheet, which is, purchase cost less accumulated depreciation.
The tax accountant is recommending a switch to the double-declining balance method to minimize taxes in the current year. Remember, with the double-declining balance method, higher depreciation expense would be reported in early years of the assets life and that will reduce the companys taxable income in those years but increase it in later years. The method only postpones the taxes. Therefore, I would advise against such a switch since the companys projected sales (and therefore tax bracket) are predicted to increase dramatically over the next 5 years, as such, that would not be beneficial to the company.
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