The managers of Navy Ltd are considering the depreciation policy for its non-current assets. The non-current assets cost £1,500,000, have an estimated useful life of 3 years and a residual value of £300,000. The accountant is suggesting a straight-line method of depreciation, but the managing director is suggesting a reducing balance method at a rate of 20%. Part a Calculate the depreciation expense for the first year of trading using each of the 2 depreciation policies suggested by the accountant and the managing director respectively. Part b Managers of companies have to make accounting policy choices (such as the depreciation policy), estimates, and assumptions when preparing the financial statements. These choices may affect asset and liability measurements and the resulting measurement of profit. Briefly explain what incentives might influence managers to make misleading policy choices and the factors that should be taken into consideration when deciding the depreciation policy.
The managers of Navy Ltd are considering the
Part a Calculate the depreciation expense for the first year of trading using each of the 2 depreciation policies suggested by the
Part b Managers of companies have to make accounting policy choices (such as the depreciation policy), estimates, and assumptions when preparing the financial statements. These choices may affect asset and liability measurements and the resulting measurement of profit. Briefly explain what incentives might influence managers to make misleading policy choices and the factors that should be taken into consideration when deciding the depreciation policy.
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