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rakhi.v, Bachelor's Degree
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Experience:  Financial & Legal Consultant Graduated in law with Emphasis on Finance - 10 yrs experience
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Companys Switch to Straight Line Depreciation

Resolved Question:

Question:
For the past twelve years the manufacturing company has enjoyed a consistent, moderate profit margin. During that time the company has carefully managed its fixed-asset purchases for both replacement and expansion with the result that, in recent years, capital expednitures have been consistently between $15,000,000 and $20,000,000 per year. In reading this years financial statement footnotes, I have learned that the Company has made an acouting change. Prior to this year, the company has depreciated its fixed assets using the Straight Line Method of Depreciation for financial statement reporting purposes and the Accelerated Method for income tax reporting purposes. Beginning with all equipment purchased this year, the company is using straight line depreciation in both reports. Assuming this policy remains in effect for several years and that the company's growth and financial trends and other practices continue as before, how should I expect the new accounting policy to affect the financial statements submitted to me (assume that I am either an investor or a creditor) for the current and the next two years?

Answer Choices:
A) Net Profit Margin will be higher, but deferred income taxes will be lower than if there were no policy change
B) Net Profit Margin and Deferred Income taxes will both be higher than if there were no policy change
C) Net Profit Margin will be lower, but deferred income taxes will be higher than if there were no policy change
D) Net Profit Margin will be unchanged and deferred income taxes will be lower than if there were no policy change
Submitted: 1 year ago.
Category: Single Problem
Expert:  rakhi.v replied 1 year ago.

Rakhi Vasavada :

Dear Friend,

Rakhi Vasavada :

Hello and welcome. Thank you for using Just Answer. Kindly remain online for a while as I prepare your reply.

Rakhi Vasavada :

The answer to this would be. B) Net Profit Margin and Deferred Income taxes will both be higher than if there were no policy change

Rakhi Vasavada :

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we get credited for assisting you. Alternatively please feel free to reply with further queries if you have and I would be more than happy to assist you further.

Warm Regards

Customer:

Rakhi--are you still there?

Customer:

Rakhi---I am not sure about this choice

Customer:

Rakhi

Rakhi Vasavada :

Hello and welcome again. I think, I lost contact to you while we were chatting.

I am sure about this choice. This is because, when you change the method of depreciation from straight line to written down, the amount of depreciation claim would reduce. This will result in increase in earnings before depreciation. The increase in earnings before depreciation would increase in net profits and this would in turn increase the tax incidence and the deferral tax.

Rakhi Vasavada :

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we get credited for assisting you. Alternatively please feel free to reply with further queries if you have and I would be more than happy to assist you further.

rakhi.v, Bachelor's Degree
Category: Single Problem
Satisfied Customers: 3853
Experience: Financial & Legal Consultant Graduated in law with Emphasis on Finance - 10 yrs experience
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Expert:  rakhi.v replied 1 year ago.
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