Question

Wild company purchased an asset. Wild used the Modified Accelerated Cost Recovery System (MACRS) to depreciate the asset for tax reporting purposes and the straight-line depreciation method for financial reporting purposes. All other things being equal, in the early years of the asset’s life the amount of income shown ____________.
a. on the tax return will be higher than the amount of income shown on the income statement.
b. on the tax return will be lower than the amount of income shown on the income statement.
c. on the tax return will be same as the amount of income shown on the income statement.
d. on the tax return will not be affected by depreciation expense.

Answer 1

Answer:

The correct answer is A.

All other things being equal, in the early years of the asset's life, the amount of income shown on the tax return will be higher than  the amount of income shown on the income state.

Here's why    

       

Explanation:

In the United States, the Modified Accelerated Cost Recovery System (MACRS) is a depreciation system used for tax purposes.

It allows the capitalized cost of an asset to be recovered over a specified period via annual deductions. The MACRS system puts fixed assets into classes that have set depreciation periods.

This depreciation system allows an asset to be depreciated faster in the first years of an asset's life and slows depreciation later on. This is beneficial to businesses from a tax perspective.

This is logical, the less the value of an assets, the less the property tax applicable to it and so the company increases it's bottom line in tax savings whiles maximizing the useful life of the asset.

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