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.

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.

SWFT Individual Income Taxes

43rd Edition

ISBN:9780357391365

Author:YOUNG

Publisher:YOUNG

Chapter18: Accounting Periods And Methods

Section: Chapter Questions

Problem 25DQ

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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?
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.
A company wishes to report the highest earnings possibleaccording to GAAP. Therefore, when calculating depreciation for financial reporting purposes,a. It will follow the MACRS depreciation rates prescribedby the IRS.b. It will estimate the shortest lives possible for itsassets.c. It will estimate the longest lives possible for its assets.d. It will estimate lower residual values for its assets.
a. For reporting purposes, management prefers higher profit; for tax purposes, lower taxable income is desired. To meet these goals, firms often use different methods of depreciation for tax and reporting purposes. Which depreciation method is best for reporting and which for tax purposes in the short run? Why?
Which of the following usually results in an increase in a deferred tax asset? A) Accelerated depreciation for tax reporting and straight-line depreciation for financial reporting. B) Prepaid insurance. C) Subscriptions delivered for which customers had paid in advance. D) None of these answer choices are correct.
Answer the following questions in depth .... Why do accountants have to classify items as capital or revenue expenditures? Why do you treat exchanges of similar and dissimilar assets differently? Aren't they all exchanges? Is it true that the higher the depreciation, the lower the net income? If that is the case, why would we not want the lowest depreciation method so we can show the highest net income? Why do we have various methods of depreciation? Isn't that encouraging misleading results?
Which of the following statements are true? Select one or more: a. MACRS must be used for book purposes if it is used for tax purposes. b. Managers often prefer the straight-line method because it helps to smooth earnings. c. Units of production method is not appropriate for natural resources. d. Double-declining balance recognizes more depreciation expense early in an asset's life. PreviousSave AnswersNext
Explain what is meant by an accelerated depreciationmethod. Are accelerated methods more widely used infinancial statements or in income tax returns? Explain.
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 depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?
The IRS requires companies that use LIFO for financial statement reporting to also use LIFO to calculate cost of goods sold on their tax returns. Why do you think the IRS wants companies to be consistent with the cost-flow assumption they use? What benefit could a company receive by choosing a different method for reporting than for its tax return?
A company determines that it is more likely than not that a portion of a deferred tax asset will not be realized. Due to the value of the beginning of the period balance, this determination caused a valuation allowance account to decrease during the current period. This situation will cause Income Tax Expense to decrease. O True O False