Question

Use the following information for questions:

Swift Company purchased a machine on January 1, 2012, for $600,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2015, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made in 2015 to reflect this additional information.

Assume that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate was 30% in 2012, 2013, 2014, and 2015. What should be reported in Swift's income statement for the year ended December 31, 2015, as the cumulative effect on prior years of changing the estimated useful life of the machine?
a. $0
b. $40,000
c. $60,000
d. $210,000

What is the amount of depreciation expense on this machine that should be charged in Swift's income statement for the year ended December 31, 2015?
a. $ 60,000
b. $ 75,000
c. $120,000
d. $150,000

Answer 1

The correct cumulative effect on prior years adjusted for the change in depreciation method is closest to $40,000 (not accounting for taxes in the options), and the depreciation expense for the year 2015 is $75,000.

Step-by-step explanation:

To solve these questions, we need to first calculate the depreciation expenses based on the original estimate, and then adjust them based on the new estimate that extended the useful life from six to eight years.

Originally, the depreciation per year would have been $600,000 divided by 6 (years) = $100,000 per year. For the first 3 years (2012, 2013, 2014), the accumulated depreciation would be $100,000 times 3 = $300,000. With the new estimate of 8 years, the annual depreciation would be $600,000 divided by 8 (years) = $75,000 per year. The accumulated depreciation for the first 3 years with the revised estimate would be $75,000 times 3 = $225,000. The difference between the original and revised accumulated depreciation amounts to $300,000 - $225,000 = $75,000. However, we need to consider the tax effect of this change. The tax effect would be $75,000 times the tax rate of 30%, which equals $22,500. Thus, the cumulative effect on prior years after accounting for taxes is $75,000 - $22,500 = $52,500

Based on the revised estimate, the annual depreciation is $75,000. As the change was made at the beginning of 2015, Swift would report $75,000 in depreciation expense for that year.

Given the provided choices, the closest answer to the cumulative effect (not adjusted for tax) is answer choice b. $40,000, and the depreciation expense for 2015 is answer choice b. $75,000.