Question

On January 1, 2016, Nobel Corporation acquired machinery at a cost of $1,600,000. 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 2019, a decision was made to change to the double-declining balance method of depreciation for this machine.

Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is:

Select one:

A. $179,200

B. $0

C. $210,560

D. $300,800.

Ernst Company purchased equipment that cost $3,000,000 on January 1, 2017. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2019. Ernst is subject to a 40% tax rate.

Ernst's net income for the year ended December 31, 2017, was understated by:

Select one:

A. $1,608,000

B. $1,800,000

C. $2,680,000

D. $3,000,000.

Answer 1

Ans Option B $0

As there is change in method of depreciation from straight line method to double declining method so there is no effect retrospectively.

There is no cumulative effect as the change will have effect prospectively.

ans

the income will be understated by

(Cost-Deprection expense as per SLM)*1-tax rate

($3000000-((3000000-120000)/9))*(100%-40%)

1608000

correct option

Option A $1608000

If any doubt please comment. If satisfied please rate