Question

Expand Your Critical Thinking 7-8

	Your answer is partially correct. Try again.

Clean Aire Anti-Pollution Company is suffering declining sales of its principal product, nonbiodegradable plastic cartons. The president, Wade Truman, instructs his controller, Kate Rollins, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $2.60 million in January 2017, was originally estimated to have a useful life of 8 years and a salvage value of $300,000. Depreciation has been recorded for 2 years on that basis. Wade wants the estimated life changed to 12 years total and the straight-line method continued. Kate is hesitant to make the change, believing it is unethical to increase net income in this manner. Wade says, “Hey, the life is only an estimate, and I’ve heard that our competition uses a 12-year life on their production equipment.”

(c)

What is the effect of Wade’s proposed change on income before taxes in the year of change?

Income before income taxes in the year of change is decreasedincreased by

$

Answer 1

c

	Old Estimates
Asset original cost	$2,600,000
Estimated salvage value	300,000
Depreciable cost	2,300,000
Depreciation charged per year (1/8)	287,500	(2300000/8 Yrs)
	Revised Estimates
Asset original cost	$2,600,000
Estimated salvage value	300,000
Depreciable cost	2,300,000
Depreciation taken to date ($287,500 X 2)	575,000
Remaining depreciable cost	1,725,000	(2300000-575000)
Remaining life in years	10 years
Depreciation per year(SLM)	$172,500	(1725000/10 Yrs)
change in depreciation expense	$115,000	(287500-172500)
Income before income taxes in the year of change is Increased by $115,000, by adopting the president
change of estimate.