Question

Gear Company records $2,000 of depr

eciation under the sum-of-ye

ars’-digits method in

2019, the company’s first year

of operations. In 2020, the comp

any decides to change to the

straight-line method f

or accounting purposes. If the straight-l

ine method were used in 2019,

depreciation would have b

een $1,500. Depreciation in 2020 under

the straight-line method is

$1,800 (depreciated based on the

book value on January 1, 2020)

. The tax rate is 25%.

Income from continuing operati

ons before tax and before deducti

ng depreciation in 2020 is

$12,000.

REQUIRED:

Provide the 2020 entry to record t

his change and calculate 2020

net income.

Answer 1

Depreciation posted in 2019	$          2,000
Actual depreciation	$        (1,500)
Depreciation overcharged	$              500

01.01.2020	Accumulated depreciation	$              500
01.01.2020	To Depreciation expenses		$           500
	(Being the depreciation that was overcharged is reduced now)
12.31.2020	Depreciation expenses	$          1,800
12.31.2020	To Accumulated depreciation		$        1,800
	(Being depreciaction charged for 2020)

Income	$        12,000
Add: depreciation overcharged	$              500
Less: deprecaition	$        (1,800)
Income before tax	$        10,700
Less Tax @25%	$        (2,675)
Net income after tax	$          8,025