Question

Swift Company purchased a machine on January 1, 2010, for $500,000. 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, 2013, 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 2013 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 2010, 2011, 2012, and 2013. What should be reported in Swift's income statement for the year ended December 31, 2013, as the cumulative effect on prior years of changing the estimated useful life of the machine?
a. $0
b. $33,000
c. $50,000
d. $175,000

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, 2013?
a. $ 50,000
b. $ 62,500
c. $100,000
d. $125,000

Answer 1

a. $0 should be reported in Swift's income statement for the year ended December 31, 2013.

Step-by-step explanation:

The change in the estimated useful life of the machine in 2013 does not result in a cumulative effect on prior years. The adjustment made is a change in accounting estimate, and according to accounting principles, it is applied prospectively rather than retrospectively. Therefore, there is no retroactive adjustment required for the years 2010, 2011, and 2012. The cumulative effect on prior years is, therefore, $0.

Regarding the depreciation expense for the year ended December 31, 2013, the revised estimated useful life of eight years is used for future depreciation calculations. The annual depreciation expense is calculated as the depreciable cost divided by the revised useful life. The depreciable cost is the original cost minus any salvage value. In this case, with no salvage value, the depreciable cost is the same as the original cost. Therefore, the depreciation expense for 2013 is $500,000 / 8 = $62,500, and the correct answer is b. $62,500. This aligns with the change in the estimated useful life made in 2013.

In conclusion, the cumulative effect on prior years is $0, and the depreciation expense for the year ended December 31, 2013, is $62,500. These figures are in line with the accounting treatment for changes in estimates.