Brockmeyer, Inc. purchased some equipment on January 1, 2016, for $300,000 that had a five-year useful life and no salvage value. Brockmeyer used double-declining-balance depreciation for both financial reporting and income tax purposes. On January 1, 2018, Brockmeyer changed to the straight-line depreciation method for this equipment and can justify the change. Brockmeyer will continue to use double-declining balance depreciation for income tax reporting. Brockmeyer's income tax rate is 30%. Assuming Brockmeyer's 2018 income before depreciation and tax is $800,000, what is the amount of Brockmeyer's net income for 2018?

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Quizplus · Accepted Answer

The correct answer is A.The depreciation expense for 2018 using double-declining-balance depreciation is $300,000 * (2/5) * (1 - 2/5) = $48,000. The depreciation expense for 2018 using straight-line depreciation is $300,000 / 5 = $60,000. The difference between the two depreciation methods is $60,000 - $48,000 = $12,000. The tax savings from the change in depreciation method is $12,000 * 30% = $3,600. The net income for 2018 is $800,000 - $60,000 + $3,600 = $534,800.