On January 1, 2016, Roy Company acquired equipment at a cost of $500,000. Roy used the double-declining-balance method to depreciate the equipment with a ten-year life and no salvage value. On January 1, 2018, Roy changed to straight-line depreciation for this equipment, and the IRS accepted this change as being eligible as a change in accounting estimate with prospective treatment. Assuming an income tax rate of 30%, what is the amount of the restatement of January 1, 2018 retained earnings?
A) $0
B) $54,800
C) $62,640
D) $82,100

Question

Quizplus · Accepted Answer

When a company changes its depreciation method, it is treated as a change in accounting estimate effected by a change in accounting principle. This type of change is accounted for prospectively, not retrospectively. Therefore, there is no restatement of prior periods' retained earnings. The depreciation expense from January 1, 2018, forward will be computed based on the new method, but the change does not affect retained earnings as of the date of the change.

On January 1, 2016, Roy Company Acquired Equipment at a Cost