A company purchases asset for $3000. It expects the asset to have a salvage value of $200 at the end of its useful life (4 yrs). Assuming that the company uses double declining depreciation, an increase in the salvage value estimate would most likely: a. Have no impact on year 3 net income b. Decrease year 3 net income c. Increase year 3 net income From my understanding, you cant answer this question correctly since they don’t give the dollar amount of the increase in salvage estimate. In year 3, there is $375 depreciation exp, so if the increase is $175 or less, then there would be no change. But if the increase is say $250, then in year 3, you would only be able to depreciate $300 and not $375; lower expenses, higher net income. Welp, my brains pretty f’ed up right now anyways, so i may have missed a simple detail. The answer on mock is A, I chose C.
this is from elan mock 3 btw
i think you are correct on this.
double-declining balance method ignores the salvage value. therefore, any change in the salvage value is irrelevant.
according to me the answer should be a because first of all change in salvage value doesn’t effect income statement . when u change an estimate its called retrospective effect which means tht u have to change the beginning retaining earning of prior years. and if they r changing the method then its prospective effect. hope this helps good luck tomm
no impact - DDB ignores salvage value
Yes it ignores the salvage value but the carrying amount cannot dip below the salvage value. I agree with OP - dazza, you may wanna recheck your lingo there… i think you got retro/prospective mixed up = retro apply to past, prospective = apply from this point onwards.
You are right, we can’t say for sure with the given information. However the question asks the most likely scenario. Hope questions on the exam will be more straightforward.
@ bbc man - ya i got mixed up with retro and prospect but apart from tht i think my reasoning is right in ddm we don’t include salvage and also any estimates will not effect i/s
I think the OP is right. If the salvage value estimate is increased by more than $175, then Year 3 net income does rise.