Question

A firm charges depreciation on straight line method. The rate of depreciation is reduced from 25% to 10%. What will be the impact of this change on profits?

• A. Decrease in profits
• B. Increase in profits
• C. Decrease in assets
• D. Increase in expenses

Answer 1

The correct option is B Increase in profits

Depreciation is transferred to debit side of profit & loss A/c. If depreciation rate is reduced from 25% to 10%,depreciation charged will be less than previous years. Thus the amount of depreciation transferred to profit and loss A/c will be less. The less amount of depreciation will be transferred to profit & loss A/c which will result in increase in profits.