Which statement about depreciation methods and earnings is true?

Which statement about depreciation methods and earnings is true?

• A. All depreciation methods have identical effects on earnings.
• B. MACRS accelerates depreciation in early years; straight-line spreads cost evenly.
• C. MACRS yields greater accounting profits in early years but offers no tax shields.
• D. Straight-line depreciation gives larger tax shields in the first year than MACRS.

Answer: (B)

Depreciation timing changes both earnings and tax effects. MACRS is designed for tax purposes to take larger depreciation deductions in the early years of an asset’s life, which lowers taxable income more in those early years and creates bigger tax shields upfront. In contrast, straight-line depreciation spreads the cost evenly over the asset’s life, giving a consistent, smaller deduction each year. So the statement that MACRS accelerates depreciation in the early years while straight-line spreads the cost evenly captures the essential difference in how these methods influence earnings and taxes over time. The other options misstate the relationship: depreciation methods do not all affect earnings identically; MACRS does provide tax shields in the early years; and straight-line does not offer larger first-year tax shields than MACRS.

Depreciation timing changes both earnings and tax effects. MACRS is designed for tax purposes to take larger depreciation deductions in the early years of an asset’s life, which lowers taxable income more in those early years and creates bigger tax shields upfront. In contrast, straight-line depreciation spreads the cost evenly over the asset’s life, giving a consistent, smaller deduction each year.

So the statement that MACRS accelerates depreciation in the early years while straight-line spreads the cost evenly captures the essential difference in how these methods influence earnings and taxes over time. The other options misstate the relationship: depreciation methods do not all affect earnings identically; MACRS does provide tax shields in the early years; and straight-line does not offer larger first-year tax shields than MACRS.