Discuss the difference between the straight-line method of depreciation and the accelerated methods. Why do companies use different depreciation methods for tax reporting and financial reporting?
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Discuss the difference between the straight-line method of
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- As explained in this chapter, accounting theory allows firms to choose a depreciation method from several equally acceptable alternatives to allocate the cost of a long-term asset to expense over the useful life of the asset. In practice, however, most organizations use the straight-line method of depreciation for financial statement presentation and the Modified Accelerated Cost Recovery System (MACRS) for tax reporting purposes because the Internal Revenue Code allows firms to use an accelerated depreciation method on their tax returns, instead of the straight-line method they report under GAAP. Discuss why a company would choose to use straight-line deprecation for financial reporting purposes and an accelerated method for tax purposes. Speculate on why the tax code might allow firms to accelerate depreciation for investments in productive resources.What is the difference between depreciation expense and accumulated depreciation? What two items surprised you that a company is allowed to capitalize? What do you know as reasons a company may choose one deprecation method over another?How does the tax depreciation methods generally permit a higher depreciation than the book depreciation methods?
- Which of the following statements is false? A For tax purposes, companies can use the MACRS depreciation method. B When you change a depreciation estimate, such as salvage value, you need to make an adjustment to retained earnings. C If the expected future cash flow is less than the carrying amount, the asset is considered impaired. D If an impairment loss is recorded, depreciation must be recalculated since the book value changed.Why would companies choose one method of accounting for Depreciation over another method? What are the benefits of each depreciation type?If a company is seeking to minimize its income tax expense, the depreciation method it would most likely select would be the: units of production method straight-line method single-and-a-half depreciation method double-declining balance method
- Many companies use an accelerated depreciation method because: A. It is required by the tax code.B. It is required by financial reporting rules.C. It yields larger depreciation expense in the early years of an asset's life.D. It yields a higher income in the early years of the asset's useful life.E. The results are identical to straight-line depreciation.What are the benefits of calculating depreciation differently for financial reports and for tax purposes?Discuss the factors that might influence a company’s choice of depreciation method as it relates to choosing ( 1) activity based methods versus time based methods (2) straight line depreciation versus other time-based methods (3) different methods for financial reporting and income tax purposes.
- Which of the following statements are FALSE? a. MACRS is the only depreciation method approved by the IRS for computing income-tax liability and it is also the most commonly used method in the United States for financial reporting. b. MACRS stands for Modified Annuitized Cost Recovery System. c. MACRS-GDS is based on double declining balance switching to straightline depreciation. d. MACRS-ADS is based on straight-line depreciation.Which of the following statements is false? A For tax purposes, companies can use the MACRS depreciation method. B When you change a depreciation estimate, such as salvage value, you need to make an adjustment to retained earnings. C If the expected future cash flow is less than the carrying amount, the asset is considered impaired. D If an impairment loss is recorded, depreciation must be recalculated since the book value changed. The answer A is wrongWhich of the following statements related to long-lived assets is true? Depreciation is calculated the same for financial reporting purposes and income tax purposes. If a company changes a depreciation estimate, it does not require a prior period adjustment. Depreciation is the process to value an asset at its fair market value. There is only one test to record an asset's impairment.