Question

Many companies use an accelerated depreciation method because:

1) It is required by the tax code.
2) It yields larger depreciation expense in the early years of an asset's life.
3) It yields a higher income in the early years of the asset's useful life.
4) The results are identical to straight-line depreciation.
5) It is required by financial reporting rules.

Answer 1

Companies use accelerated depreciation to get larger depreciation expenses early on, reducing taxable income in those years, but it does not always result in higher early net income or conform to all financial reporting rules.

Step-by-step explanation:

Many companies use accelerated depreciation methods such as the Double Declining Balance or Sum-of-the-Years' Digits because it yields larger depreciation expenses in the early years of an asset's life. This front-loaded depreciation method can lead to reduced taxable income in the earlier years under certain tax codes, which may save the company money on taxes during those years.

However, it does not necessarily yield a higher income; in fact, it reduces net income in the early years compared to methods like straight-line depreciation. It's important to note that while some tax codes allow or encourage accelerated depreciation, it is not required by all financial reporting rules; companies often report depreciation differently for tax and financial reporting purposes.