Accounting Online Program Certification Practice Test

What depreciation method was changed to at Spam plc in June 20X5?

1. Straight-line method

2. Reducing balance method at 40%

3. Fixed rate method

4. Sum of the years' digits method

The correct answer is: Reducing balance method at 40%

The decision at Spam plc to change to the reducing balance method at a 40% rate reflects a strategic approach to depreciation that allows for a more accelerated write-off of the asset's value. This method applies a fixed percentage to the carrying amount of the asset at the beginning of each period, resulting in higher depreciation expenses in the earlier years of the asset's life. This is particularly advantageous for businesses that want to reduce taxable income in the short term as it increases expenses in the earlier years. The reducing balance method commonly aligns with the pattern of asset usage and reflects the fact that many assets lose value more rapidly in their earlier years. This method can provide a better matching of revenue and expenses in instances where the asset contributes more significantly to generating revenue in early years. Furthermore, the choice of changing the method indicates a likely reevaluation of asset management or an adaptation to changing financial strategies, potentially influenced by tax considerations or changes in operational requirements. In contrast, other methods listed, like the straight-line method, allocate depreciation evenly over the useful life of the asset, which may not accurately reflect the actual economic usage. Fixed rate and sum of years' digits methods may not be as aligned with Spam plc's strategic financial growth objectives or may have been less favorable in