A company has been using straight-line depreciation over the last several years,which has amounted to a total of $20,000 depreciation before tax for those past years.This year,it decided to change to units of production,which would have caused $30,000 of depreciation to be recognized in those past years,before tax.The tax rate has always been 40%.This year's depreciation under both methods is: The cumulative effect account resulting from this change will decrease net income by:

Question

A company has been using straight-line depreciation over the last several years,which has amounted to a total of $20,000 depreciation before tax for those past years.This year,it decided to change to units of production,which would have caused $30,000 of depreciation to be recognized in those past years,before tax.The tax rate has always been 40%.This year's depreciation under both methods is:  The cumulative effect account resulting from this change will decrease net income by:

Quizplus · Accepted Answer

Under the straight-line method, depreciation before tax for past years was $20,000. If the company had used units of production method from the beginning, it would have recognized $30,000 of depreciation before tax for those past years. Therefore, the cumulative effect of this change is an increase in depreciation of $10,000 ($30,000 - $20,000).

The tax rate is 40%, so the tax benefit of the increase in depreciation is $4,000 ($10,000 x 40%).

The net effect on income is a decrease of $6,000 ($10,000 - $4,000). Therefore, the cumulative effect account resulting from this change will decrease net income by $6,000.

A Company Has Been Using Straight-Line Depreciation Over the Last