The discussion for the week focuses on whether accelerated depreciation is better for or assist a startup company by way of a reduction in tax liability for a new hardware purchase. In this discussion, you are to outline the advantages of accelerated depreciation vis-à-vis those of a straight-line depreciation. Additionally, you are to point out which of the two depreciation methods would benefit a startup company better.
Your friend is the accountant for Jackrabbit Inc., a computer server startup company. The friend asks you if accelerated depreciation would help Jackrabbit reduce the tax liability on a recent hardware purchase. What are some advantages of accelerated depreciation as compared to a straight-line method, and which method would benefit a startup company like Jackrabbit? Answer these questions in one paragraph with one source at least APA.
As we focus on Accelerated Depreciation Method this week, please follow the two links below to the YouTube videos that present an overview accelerated depreciation method. Please use: “Ctrl+Click” to access the videos.
1. What does Accelerated Depreciation mean?
2. Accelerated Depreciation Method definition
Then, respond two of your classmates’ postings in any of the following ways:
- Build on something your classmate said
- Explain why and how you see things differently
- Share an insight from having read your classmate’s posting
- Offer and support an opinion
- Expand on your classmate’s posting
The respond should be one short paragraph with at least 7 sentences.
Depreciation is computed using the straight-line method (purchase price less salvage value divided by life in years) and a double declining/accelerated method (doubles the depreciation expense for the first year and applies that percentage to remaining useful life years).
An advantage of the accelerated method is reaping the tax benefit. Since this method writes off more assets from revenue, it reports lower income, which results in paying lower taxes. Another advantage is the equipment maintenance expenses that will incur during the useful life, so the faster depreciation can offset the maintenance charges that occur in the later years. In other words, less expense shows more revenue (Jun, 2011).
For a start-up computer server company, the accelerated depreciation option would be viable in order to reap the tax benefit. And also because computers do not have a long useful life (values deteriorate quicker the first few years) using the accelerated method is adequate (Jun, 2011).
Jun, J. (2011, April 18). Old School Value. Understanding the Straight Line and Accelerated Depreciation Methods.Retrieved from https://www.oldschoolvalue.com/blog/valuation-meth...
There are different methods companies can use to depreciate their fixed assets. Time-based methods include straight-line and accelerated which consists of sum-of-the-years'-digits and declining-balance methods (Wahlen, Jones, & Pagach, 2017). Straight-line method allocates the asset's cost to the depreciation expense evenly over its useful life, while the accelerated method allocates the majority of its cost to depreciation expense in the earlier years of the asset's useful life. A startup company like Jackrabbit Inc., could benefit from an accelerated depreciation method since its tax liability can be deferred for a short term. This tax benefit is only temporary because the depreciation expense in the later years of the asset will be much lower and the company will have a higher tax liability. Another advantage of the accelerated method is that a technological asset like hardware is likely to become outdated before the end of its useful life due to the rapid growth in this field and there will be more risk related to the cash flow the asset will produce in the later years of its life compared to the earlier years (Wahlen et al., 2017).
Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and analysis. Boston, MA: Cengage Learning