About depreciation methods

Question

Assuming that company X following straight line depreciation method and company Y is using double declining method. What will be the effect on both net income and total assets at early years?               

A)Company X will record higher net income and higher total assets compared to company Y.                                B)Company X will record higher net income, but lower total assets compared to company Y. 

C)Company X will record lower net income and lower total assets compared to company Y. 

D)Company X will record lower net income, but higher total assets compared to company Y. 

Answer 1

The answer is A) Company X will record higher net income and higher total assets compared to Company Y. This is because the double-declining method results in a very high depreciation expense in early years (which then declines as the years pass); this means that net income in those years will inherently be lower than net income for a company using straight-line depreciation because depreciation expense is deducted from total revenues in the process of arriving at net income. Furthermore, depreciation expense flows into Accumulated Depreciation on the balance sheet, which causes total assets to be lower as well.