Q1. GAAP allows choices with regard to depreciation methods. In the first year of an asset’s useful life, if the straight-line rather than the double-declining-balance depreciation method is used then:
a. reported depreciation expense will be (________ / higher), which leads to (lower / ________) net income.
b. reported accumulated depreciation will be (________ / higher), which leads to (lower / ________) book value and (lower / ________) total assets.
Q2. To make net income appear as favorable as possible, the controller would choose the (________ / double-declining-balance) depreciation method for assets placed in service during the current year.
Q3. Is intentionally choosing a depreciation method that reports higher net income ethical? (________ / No / Maybe) Legal? (________ / No / Maybe) Explain.
GAAP (generally accepted accounting principles) allows companies a choice of depreciation method. The intent of the choice is to allow companies to choose the method that best reflects economic reality, but many times other considerations determine the decision.
Q4. Depreciation expense is based on estimates of useful life and residual value. To make net income appear as favorable as possible, the controller would (shorten / ________) the useful life and (________/ lower) the residual value of the asset.
Q5. Is intentionally choosing an estimated useful life and residual value that report higher net income ethical? (Yes / No / ________) Legal? (Yes / No / ________) Explain.
Q6a. For financial statement purposes, a company generally prefers to report (lower / ________) net income and therefore would choose the (________/ double-declining-balance) depreciation method.
b. For income tax purposes, a company generally prefers to report (________/ higher) taxable income and therefore would choose the (straight-line / ________) depreciation method.
c. Is intentionally choosing one depreciation method for financial statement purposes and a different method for income tax purposesethical? (________/ No / Maybe) Legal? (________/ No / Maybe)
Q7. Identify at least three items that the controller could use to make net income appear more favorable with regard to the depreciation of assets placed in service during the current year that are both ethical and legal.