Question

The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant.
A. True
B. False

Answer 1

Answer:

A. True

Explanation:

Depreciation refers to a fall in the value of an asset due to normal wear and tear, technological obsolescence or efflux of time. There are different ways of charging depreciation such as straight line method, diminishing balance method, double decline or accelerated depreciation method.

Under straight line method, a fixed amount of depreciation is charged every year with total depreciation evenly spread over the life of the asset.

Under accelerated depreciation method, the depreciation is charged at twice the rate of straight line rate of depreciation, which means depreciation would be the most in the first year and would be the least in the final year of asset life.

As we know, present value of depreciation would be most in the first year and least in the last year of asset life, it means the tax saving, which is tax percentage of the depreciation amount, would be most in the first year.

Due to this, the present value of total tax saving provided by depreciation, would be more under the accelerated method than straight line method, keeping other factors constant.