Question

On January 1, 2016, Piper Co., purchased a machine (its only depreciable asset) for $900,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2019, for financial statement reporting, Piper decided to change to the straight-line method for depreciation of the machine. Assume that Piper can justify the change. Piper's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2019, is $750,000. The income tax rate for 2019, as well as for the years 2016-2018, is 30%. What amount should Piper report as net income for the year ended December 31, 2019

Answer 1

$462,000

Step-by-step explanation:

Computing the Sum-of-the-years'-digits depreciation

Accumulated Depreciation till 2018 = $900,000*(5+4+3)/15

Accumulated Depreciation till 2018 = $900,000*12/15

Accumulated Depreciation till 2018 = $720,000

Book Value at beginning 2019 = $900,000 - $720,000 = $180,000

Depreciation Expense in 2019 = $180,000/2 = $90,000

Net Income before depreciation & taxes = $750,000

Depreciation = $90,000

EBT = Net Income before depreciation & taxes - Depreciation = $750,000 - $90,000 = $660,000

Tax Expenses = EBT * Tax rate = $660,000*30% = $198,000

Net Income = EBT - Tax Expenses

Net Income = $660,000 - $198,000

Net Income = $462,000

So therefore, Piper should report $462,000 as net income for the year ended December 31, 2019