Assume that Besley Golf Equipment commenced operations on January 1, 2014, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2014 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?

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Business

Denisse

17 November, 14:42

Assume that Besley Golf Equipment commenced operations on January 1, 2014, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2014 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?

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Camden Porter · Answer 1

See the explanation below.

Explanation:

Depreciation refers to a fall in the value of a fixed asset as result of wear and tear over time.

When two depreciation assumptions or rates are being considered for a fixed asset, one will lead to a higher depreciation than the other and the choice of either choice will have different effects on the financial statements.

From the question, if we assume that the depreciation assumptions will be applied on straight-line method basis, changing the assumption of depreciation of the fixed assets to over 10 years will lead to a higher depreciation than that of over 15 years. For example, if the cost of the asset is $100,000, depreciating over ten years will produce yearly depreciation of $10,000 while, depreciating over 15 years will produce a lower amount of $6,667.

As financial statements majorly consists of income statements, balance sheet and statement of cash flows, changing to 10 years instead of 15 years to depreciate the fixed asset will have the following effects on each of the components of the financial statement.

1. Income Statement: The increased depreciation will directly reduce the profit that appears on the income statement of Besley Golf Equipment.

2. Balance Sheet: The increased depreciation will increase the accumulated depreciation and will therefore reduce the net book value of the fixed asset that appear in the balance sheet.

3. Statement of cash flows: Increased depreciation will not directly affect the cash flows statement it is a non-cash expense. However, it will indirectly affect the statement of cash flows when tax return is being prepared. Since Besley Golf Equipment was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes, the increased depreciation will be listed as an expense which will reduce the taxable income, and therefore reduce the amount Besley Golf Equipment will pay as tax.

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