MC Chapter 4 – Implementing Accounting Analysis

Question 1

Q4.1. Company A’s non-current assets have a residual value of zero, a beginning book value of €5,000, and an initial cost of €10,000. Company A uses an annual depreciation percentage of 10%. Its statutory
(and effective) tax rate is 30 percent. What adjustments would an analyst make to company A’s
beginning equity and non-current assets if she assumes that company A’s depreciation percentage
should be 12%?

A. Decrease non-current assets by €1,000; decrease equity by €1,000
B. Decrease non-current assets by €2,000; decrease equity by €2,000
C. Decrease non-current assets by €1,000; decrease equity by €700
D. Decrease non-current assets by €2,000; decrease equity by €1,400

Answer 1

Q4.1. Company A’s non-current assets have a residual value of zero, a beginning book value of €5,000, and an initial cost of €10,000. Company A uses an annual depreciation percentage of 10%. Its statutory
(and effective) tax rate is 30 percent. What adjustments would an analyst make to company A’s
beginning equity and non-current assets if she assumes that company A’s depreciation percentage
should be 12%?

A. Decrease non-current assets by €1,000; decrease equity by €1,000
B. Decrease non-current assets by €2,000; decrease equity by €2,000
-> C. Decrease non-current assets by €1,000; decrease equity by €700
D. Decrease non-current assets by €2,000; decrease equity by €1,400