A firm chooses an accelerated method for tax purposes. Its motive is that
Answer: A
The same total is written off and the same total tax eventually paid, but paying later is cheaper measured today. Reported early profits are reduced rather than increased, which is why firms often keep two sets of schedules.
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An asset's book value after 3 years is 40 000 and its market value 55 000. In a replacement study the relevant figure is
Answer: B
Correct answer: 55 000, the amount realisable on disposal
A replacement study asks what keeping the asset costs from today onward, and keeping it means forgoing the 55 000 that could be had by selling it. That opportunity cost is the relevant figure. The book value is an accounting record of past allocations and the original cost is sunk; neither affects any decision now.
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Assertion: depreciation affects a project's cash flow. Reason: it reduces the tax payable.
Answer: C
Correct answer: both the assertion and the reason are true and the reason explains the assertion
Both are true and the reason is the only mechanism by which the effect occurs. Depreciation moves no money itself, but it reduces taxable income and hence the tax actually paid, and that reduction is a real cash flow. This is why after-tax analysis must model depreciation and why the method chosen affects a project’s worth.
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Assertion: an accelerated method reduces the total tax a firm pays on an asset. Reason: it charges more depreciation in the early years.
Answer: D
Correct answer: the assertion is false although the reason offered is a true statement in itself
The reason is true and the conclusion does not follow. An accelerated method takes the same total deduction over the life, so the total tax is unchanged; what changes is when the saving arrives. Because money has a time value, the earlier saving is worth more in present value - a benefit of timing rather than of amount.
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Comparing the service output method with straight line for a machine that stands idle for a year, service output charges
Answer: A
Correct answer: nothing for that year
The service output method charges by units produced, so a machine that produces nothing is charged nothing and its book value is unaltered. Straight line would charge the full annual amount regardless. The difference is exactly why the method is chosen for equipment whose use is irregular.
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None of the following is an accounting figure rather than an economic one except
Answer: B
Correct answer: book value
Book value is a bookkeeping figure, the first cost less the depreciation charged so far according to a chosen method, and it need bear no relation to what the asset is worth. Market value, disposal proceeds and realised salvage are all economic quantities, being amounts of money that could actually change hands.
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