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A fixed asset with a 5‐year estimated useful life is sold during the second year. How would the use of the straight‐line method of depreciation instead of the double‐declining balance method of depreciation affect the amount of gain or loss on the sale of the fixed asset?

Respuesta :

Answer:

c)        Decrease              Increase

Explanation:

First, the multiple options to the question are as follows

             Gain                      Loss

a)        NO effect              NO effect

b)        No effect              Increase

c)        Decrease              Increase

d)        Increase                Decrease

First, we understand the difference between the two methods, which are straight line method and double declining method. The straight line method uses a single rate/percentage on an annual basis to calculate depreciation while the double declining method uses at least twice the measurement as the straight line method.

Therefore, using the double declining method, when the sales value is higher than the depreciation base means that the higher depreciation used by the double declining method leads to a decrease in gains.

On the contrary, should the sales value be less than the depreciation base, then the double declining method will increase the loss

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