Question

Pharoah Company purchased a machine on January 1,2022 for $933000. At the date of acquisition, the machine had an estimated useful life of 6 years with no salvage. The machine is being depreciated on a straight- line basis. On January 1, 2025, Pharoah determined, as a result of additional information, that the machine had an estimated useful life of 8 yoars from the date of acquisition with no salvage. An accounting change was made in 2025 to reflect this additional information. Assume that the direct effects of this change are limited to the effects on depreciation and the related tax provision and that the income tax rate was 30% in 2022. 2023.2024, and 2025. What should be reported in Pharoak's income statement for the year ended December 31.2025, as the cumulative effect on prior years of changing the estimated useful life of the machine? eTextbook and Medla

Answer 1

To determine the cumulative effect on prior years of changing the estimated useful life of the machine, we need to calculate the depreciation expense for the years 2022 to 2025 using the original and revised estimated useful life. Here's how we can do it:

1. Calculate the annual depreciation expense for the original estimated useful life of 6 years:

The machine was purchased for $933,000 with no salvage value. Therefore, the annual depreciation expense is calculated as ($933,000 / 6) = $155,500.

2. Calculate the total depreciation expense for the years 2022 to 2024 based on the original estimated useful life of 6 years:

Total depreciation expense = Annual depreciation expense * Number of years

Total depreciation expense = $155,500 * 3 = $466,500

3. Calculate the remaining book value of the machine at the beginning of 2025:

The original cost of the machine was $933,000, and it was depreciated for 3 years (2022 to 2024). Therefore, the remaining book value is calculated as ($933,000 - $466,500) = $466,500.

4. Calculate the revised annual depreciation expense for the remaining 2 years of the revised estimated useful life of 8 years:

The remaining book value of $466,500 will be depreciated over 2 years. Therefore, the revised annual depreciation expense is calculated as ($466,500 / 2) = $233,250.

5. Calculate the cumulative effect on prior years of changing the estimated useful life of the machine:

The cumulative effect is the difference between the total depreciation expense based on the original estimated useful life ($466,500) and the total depreciation expense based on the revised estimated useful life ($233,250).

Cumulative effect on prior years = Total depreciation expense (Original) - Total depreciation expense (Revised)

Cumulative effect on prior years = $466,500 - $233,250 = $233,250

Therefore, Pharoah's income statement for the year ended December 31, 2025, should report a cumulative effect on prior years of changing the estimated useful life of the machine as $233,250.

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