Question

Profitable businesses will likely use ______ depreciation while companies with lower marginal rates that are expected to rise over time will likely use ______ depreciation.

a. Straight-line; Accelerated
b. Accelerated; Straight-line
c. Double declining balance; Straight-line
d. Sum-of-the-years-digits; MACRS

Answer 1

Profitable businesses will likely use Straight-line depreciation while companies with lower marginal rates that are expected to rise over time will likely use Accelerated depreciation.

Step-by-step explanation:

Profitable businesses will likely use Straight-line depreciation while companies with lower marginal rates that are expected to rise over time will likely use Accelerated depreciation.

Straight-line depreciation evenly spreads the cost of an asset over its useful life, which is beneficial for businesses that generate consistent profits. Accelerated depreciation allows businesses to deduct higher depreciation expenses in the early years of an asset's life, which can help offset higher tax liability.

For example, a profitable company that expects its marginal tax rate to remain stable over time may prefer the predictability of straight-line depreciation. On the other hand, a company with lower current marginal rates, but anticipating higher rates in the future, would benefit from accelerated depreciation to maximize tax deductions while their rates are lower.