On January 1, 2011, Key Corporation acquired machinery at a cost of $1,200,000.

Question

On January 1, 2011, Key Corporation acquired machinery at a cost of $1,200,000. Key adopted the double-declining balance 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 2014, a decision was made to change to the straight-line mthod of depreciation for this equipment. Assuming a 30% tax rate, the effect of this accounting change should be reported by Key in its 2014....

a) income statement as a $170,625 cumulative effect of accounting change, net of tax.
b) retained earnings statement as a $170,625 addition to the beginning balance, net of tax.
c) retained earnings statement as a $243,750 addition to the beginning balance.
d) income statement with a $101,250 for the depreciation expense before tax.

PLEASE SHOW ALL CALCULATIONS. THANK YOU.

Explanation / Answer

Depreciation as per SLM method = $ 1200000/8 year = $150000 SLM rate of depreciation = $150000/$1200000 = 12.50 Double decline dep rate = 12.50*2 time = 25% per annum Calculation Dep. Cost Dep. Value after dep. Year 2011 $12,00,000.00 $3,00,000.00 $9,00,000.00 Year 2012 $9,00,000.00 $2,25,000.00 $6,75,000.00 year 2013 $6,75,000.00 $1,68,750.00 $5,06,250.00 Year 2014 $5,06,250.00 $1,26,562.50 $3,79,687.50 total depreciation provided in books upto 2013 =$300000+$225000+$168750 =$ 693750 Depreciation as per SLM Method =$150000*3 year = $ 450000 Excess Depreciation provided in books =$693750-$450000 = $ 243750 hence $ 243750 is credited to income statement tax @ 30% on 243750 = $ 73125 So $243750 - $73125 =$ 170625 net effect on income statement

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