On January 1, 2014, Margo Company acquired machinery at a cost of $160,000. This machinery was being depreciated by the double-declining-balance method over an estimated life of five years with no salvage value. At the beginning of 2016, Margo changed to and could justify straight-line depreciation. Margo's tax rate is 30 percent. The depreciation expense to be included in 2016 net income was
A) $ 7,200
B) $24,000
C) $19,200
D) $38,400

Question

Quizplus · Accepted Answer

The machinery was being depreciated using the double-declining-balance method, and its estimated useful life was five years. Therefore, the depreciation rate was 2/5 or 40% (double of the straight-line rate of 1/5 or 20%).

Using the double-declining-balance method, the depreciation expense for 2014 and 2015 was:
2014: ($160,000 x 40%) = $64,000
2015: ($96,000 x 40%) = $38,400

At the beginning of 2016, Margo changed to the straight-line method. To calculate the depreciation expense for 2016, we need to compute the remaining depreciable base as of the beginning of the year.

The book value at the beginning of the year 2016 would be:

Cost - Accumulated Depreciation
$160,000 - ($64,000 + $38,400) = $57,600

The machinery now has a remaining useful life of 3 years (2016-2014). Using the straight-line method, the depreciation expense for 2016 would be:
($57,600 / 3) = $19,200

To find the tax effect, we multiply the depreciation expense by the tax rate:
($19,200 x 30%) = $5,760

Therefore, the depreciation expense to be included in 2016 net income is:
$19,200 - $5,760 = $13,440

The closest answer is C, $19,200, but we need to subtract the tax effect to get the actual expense to be included in net income.

On January 1, 2014, Margo Company Acquired Machinery at a Cost