On January 1, 2012, Neal Corporation acquired equipment at a cost of $720,000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2015, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2015 would be
A) $37,500.
B) $60,000.
C) $90,000.
D) $144,000.

Question

Quizplus · Accepted Answer

According to the sum-of-the-years'-digits method, the remaining useful life of the equipment at the beginning of 2015 would have been (8-3) = 5 years. The total depreciation under this method would have been:

Year 1: (8/36) x $720,000 = $160,000
Year 2: (7/36) x $720,000 = $140,000
Year 3: (6/36) x $720,000 = $120,000
Year 4: (5/36) x $720,000 = $100,000

Total depreciation for 2012-2014: $520,000

Book value at the beginning of 2015: $720,000 - $520,000 = $200,000

Under the straight-line method, the annual depreciation would be ($720,000 - $0)/8 = $90,000. Therefore, the depreciation expense for 2015 would be:

$90,000 x 5/12 (for 5 months) = $37,500

However, since the company changed depreciation methods, they need to adjust for the difference between the depreciation taken under the old method and the depreciation that would have been taken under the new method. This is done by taking the difference between the book value of the asset at the time of the change and the total amount of depreciation taken under the old method. In this case, the difference is:

Book value at the time of change: $720,000 - $520,000 - $520,000 = $200,000
Total depreciation taken under the old method: $520,000

Difference: $200,000 - $520,000 = -$320,000

Since this is a decrease in depreciation, it is treated as a gain and is recorded in the income statement. Therefore, the total depreciation expense for 2015 would be:

$37,500 + $320,000 = $357,500

However, the question only asks for the depreciation expense for 2015, not the total change in depreciation expense. Therefore, the answer is B) $60,000.

On January 1, 2012, Neal Corporation Acquired Equipment at a Cost