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Depreciation Methods

On January 1, 2005, Baden Co., purchased a machine (its only depreciable asset) for $300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2008, for financial statement reporting, Baden decided to change to the straight-line method for depreciation of the machine. Assume that Baden can justify the change.
Baden's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2008, is $250,000. The income tax rate for 2008, as well as for the years 2005-2007, is 30%.

What amount should Baden report as net income for the year ended December 31, 2008?
A) $60,000
B) $91,000
C) $154,000
D) $175,000

Solution Preview

For your convenience, I have attached a formatted MS Excel spreadsheet containing the text below.

Depreciation change in accounting method

On January 1, 2005, Baden Co., purchased a machine (its only depreciable asset) for $300,000.
The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has
been used for financial statement reporting and the elective straight-line method for income tax reporting.
Effective January 1, 2008, for financial statement reporting, Baden decided to ...

Solution Summary

This formatted MS Excel speadsheet contains examples on the use of straight-line and sum-of-the-years depreciation methods.

$2.19