Question

Use the following information for questions 47 and 48.

On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015, a decision was made to change to the double-declining balance method of depreciation for this machine.

47. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is
a. $134,400.
b. $0.
c. $157,920.
d. $225,600.

48. The amount that Nobel should record as depreciation expense for 2015 is
a. $120,000.
b. $168,000.
c. $240,000.
d. none of these are correct.

Answer 1

The cumulative effect on Nobel Corporation's beginning retained earnings, after accounting for a 30% tax rate, is $157,920, making the correct answer (c). For 2015, the depreciation expense under the double-declining balance method is $122,880, which is not listed among the options, so the correct answer for the depreciation expense is 'none of these are correct'.

Step-by-step explanation:

Calculation of Cumulative Effect on Retained Earnings

We will calculate the cumulative effect of the accounting change on Nobel Corporation's beginning retained earnings. The original depreciation under the straight-line method for three years (2012, 2013, and 2014) on $1,200,000 over ten years with no residual value would be $120,000 per year, totaling $360,000 ($120,000 x 3 years). The book value at the beginning of 2015 would thus be $1,200,000 - $360,000 = $840,000.

Under the new double-declining balance method, the depreciation for each of the first three years would be different. For the first year, it would be $1,200,000 x 20% = $240,000. Remaining book value at the beginning of 2013 would be $960,000 ($1,200,000 - $240,000).

For the second year, it's 20% of the new book value, thus $960,000 x 20% = $192,000. Remaining book value at the beginning of 2014 would now be $768,000 ($960,000 - $192,000).

For the third year, again, it's 20% of the new book value, so $768,000 x 20% = $153,600. Remaining book value at the end of 2014 would now be $614,400 ($768,000 - $153,600).

The difference between the straight-line book value and the double-declining balance book value at the beginning of 2015 would be: $840,000 (straight-line) - $614,400 (DDB) = $225,600.

However, because there is an income tax rate of 30%, the net effect on retained earnings is the difference multiplied by (1 - tax rate). Thus, the cumulative effect on beginning retained earnings is $225,600 x (1 - 0.30) = $157,920.

Calculation of Depreciation Expense for 2015

For the year 2015, using the double-declining balance method, the depreciation expense would be 20% of the book value at the beginning of 2015 which is $614,400. Therefore, the depreciation expense for 2015 is $614,400 x 20% = $122,880. Since this figure is not listed in the options provided, the closest option would be 'none of these are correct'