Question

Ventura Corporation purchased machinery on January 1, 2012 for $840,000. The company used the sum-of-the-years'-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2013, Ventura changed to the straight-line depreciation method for this asset. The following facts pertain:

2012 2013
Straight-line
$140,000 $140,000
Sum-of-the-years'-digits 240,000 200,000

Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a. $180,000.
b. $160,000.
c. $96,000.
d. $0.

Answer 1

The cumulative effect of Ventura Corporation's accounting change on beginning retained earnings is $96,000, which is calculated by determining the difference in depreciation under the two methods and adjusting for tax effects.

Step-by-step explanation:

The question presented involves a situation in which Ventura Corporation changed its depreciation method from the sum-of-the-years'-digits to the straight-line method. To find the cumulative effect of this accounting change on beginning retained earnings, we need to compare the depreciation expenses recorded under both methods and then apply the tax effect.

For 2012 and 2013, the depreciation using the sum-of-the-years'-digits method was $240,000 and $200,000, respectively. Using the straight-line method, it would have been $140,000 each year. The differences in depreciation expenses are $100,000 for 2012 and $60,000 for 2013, totaling $160,000. This is the pretax effect of the change. To find the after-tax effect, we multiply $160,000 by 60% (1 - the 40% tax rate), which equals $96,000.

Thus, the cumulative effect on beginning retained earnings is $96,000, which means the correct answer is option c. $96,000.