4.2. Switching Process

Try these first

1. 1.

   What is the definition of salvage value?

   Hint

   Think about the end value of an asset.

2. 2.

   What formula is used for Double Declining Balance method?

   Hint

   Consider the basic idea of doubling the rate.

3. 3.

   What is the main reason for switching depreciation methods?

   • To increase taxes
   • To align book value with salvage value
   • To decrease asset value

   Hint

   Think about the relationship between depreciation and asset value.

4. 4.

   True or False: The Straight Line method results in higher initial depreciation compared to DDB.

   • True
   • False

   Hint

   Consider how each method allocates its depreciation.

5. 5.

   Using the given costs, calculate the depreciation for the first three years using both DDB and Straight Line and determine when to switch methods.

   Hint

   Summarize calculations systematically for clear visibility on depreciation values.

6. 6.

   Discuss the implications of not switching methods — how could it affect the financial legitimacy of a company?

   Hint

   Think about stakeholders' perspectives on reliable financial statements.