Final answer:
Many companies use accelerated depreciation (double declining balance) in computing taxable income because it allows them to write off more of the cost of an asset in its early years, reducing their taxable income and tax burden.
Step-by-step explanation:
Many companies use accelerated depreciation (double declining balance) in computing taxable income because it allows them to write off more of the cost of an asset in its early years. This method of depreciation assumes that an asset loses its value more rapidly in the beginning and then gradually slows down over time. By using accelerated depreciation, companies can reduce their taxable income and therefore lower their tax burden.
For example, let's say a company purchases a piece of machinery for $10,000 with a useful life of 5 years. Using straight-line depreciation, the company could deduct $2,000 each year for 5 years. However, with accelerated depreciation, the company could deduct a larger portion of the cost in the first few years, such as $4,000 in year 1, $2,400 in year 2, and so on.
This method of depreciation is preferred by companies because it provides them with more immediate tax benefits, which can help improve their cash flow and overall financial position.