CFA Practice Question

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CFA Practice Question

Carter Co. and Greer Corp. purchased identical plant assets, and both companies estimated the useful life at 10 years with no salvage value. Carter uses straight-line depreciation in its financial statements, whereas Greer uses an accelerated method. Which statement is correct?

A. Over the life of the asset, Greer will recognize more depreciation expense than Carter.
B. In the tenth year of ownership, Carter will recognize more depreciation expense on this asset than Greer.
C. If the asset is sold after 4 years, Carter is more likely to report a gain than is Greer.
Correct Answer: B

User Contributed Comments 7

User Comment
danlan Depreciation in income tax return and financial statement can be different. But the inventory method (FIFO, LIFO, ..) should be the same in tax return and financial statement.
sergei I cannot paste the Excel sheet I made: just calculate deprecation of $1,000 asset according the two methods: you will get total 10-year deprecation of 1000 in straight method and 892.63 if you use *2 deprecation
gizi B is correct because under MACRS, more depn is charged in the earlier yrs than in the latter yrs. The S-L method would have the same depn per yr thoughout. Therefore in the 10th yr the depn under S-L would be higher than that under MACRS.
CoffeeGirl under same year, using straight line method results more depreciation expenses at the end.
aestus Not C, b'coz although Carter asset value is higher, depreciation is an accounting allocation and not a valuation process.
johntan1979 B is right, don't waste precious time calculating C

This helped visualise it
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