Question

Net income is __________________ if, in the first year, estimated salvage value is excluded from the depreciation computation when using the ________________ .

Multiple Choice

a)understated; units of production method

b)understated; double-declining balance method

c)overstated; straight-line method

d)overstated; sum-of-the-years' digits method

Answer 1

Answer:

Correct option is a)

understated ; Units of production methods.

Explanation:

Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the units of production methods.

Units of production methods calculate Depreciation expense by cost of Asset less salvage value multipled by the per unit depreciation expense. So if Salvage Value will be excluded from the Depreciation then Depreciation expense will rise and net income will decrease.

Note:

Option c and d i.e straight line method and sum of year digit method also understated profit if Salvage Value excluded from the Depreciation expense.

There is no use of salvage value while calculating Depreciation expense by using Double declining balance methods.