Question

While reviewing Zosia’s financial statements, your boss was concerned that they had change the method of accounting for depreciation from 130% declining balance to straight line for their equipment. The footnote explaining the accounting change provided the following explanation. The original reason that Zosia used 130% declining balance was that based on an engineering study that the increase in maintenance costs of the equipment as it aged mirrored the decline in the depreciation expense so the sum of the two remained constant year to year. The reason they changed to straight line is that a current study determines that even though maintenance costs still increase with the age of the equipment, they are significantly lower than in the past. Evaluate whether you believe the change was warranted.

Answer 1

Change of Depreciation Method from 130% Declining Balance Method to Straight Line Method

Under 130% Declining Balance Method , Initially depreciation will be charged/expensed more as compared to Straight Line Method.

Zosia initially used 130% Declining Balance Method , as it wanted to make synchronisation between increase in maintenance costs and depreciation amount as the asset ages. Now it switched to SLM , since it assumes maintenance costs will be significantly lower than in past. This Method is warrantied as it will give an impact on Income statement of Company which will be a balanced figure between maintenance expenses and depreciation expenses.