Which statement about depreciation methods is true?

• A. The revised statement should reflect MACRS accelerates depreciation in early years and straight-line spreads cost evenly.
• 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)

The main idea being tested is how depreciation methods allocate cost over time and how that affects tax benefits. MACRS is designed to front-load depreciation, giving a larger deduction in the early years of an asset’s life. Straight-line depreciation, on the other hand, spreads the same amount of depreciation evenly across each year of the asset’s life. Because of that, the statement that MACRS accelerates depreciation in early years and straight-line spreads cost evenly captures the essential difference between the two methods.

Think of it in terms of tax shields: larger depreciation in the early years under MACRS means a bigger tax shield sooner, which is a key reason firms prefer MACRS for tax planning. Straight-line provides a steady, predictable deduction year to year, resulting in steadier tax effects and profits on financial statements.

The other options mix in meta language or make false claims about profits or tax shields. For instance, claiming MACRS yields greater accounting profits in the early years contradicts how depreciation reduces net income, and saying there’s no tax shield under MACRS ignores the actual tax-deductible nature of depreciation. Likewise, saying straight-line gives larger first-year tax shields is incorrect because MACRS generally provides the larger early-year deduction.