Question

10) On December 31, 2021, ABC, Inc. changed its inventory valuation method to FIFO cost from LIFO cost for financial statement and income tax purposes. The change will result in a $280,000 increase in the beginning inventory at January 1, 2021. Assume a 20% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is _______

11) Saturn Company purchased a machine on January 1, 2018, for $900,000. At the date of acquisition, the machine had an estimated useful life of ten years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2022, Saturn determined that the machine had an estimated useful life of 15 years from the date of acquisition with no salvage. An accounting change was made in 2022 to reflect this additional information.What is the amount of depreciation expense for the year ended December 31, 2022?

Answer 1

10)	Due to change in the inventory valuation method from LIFO to FIFO,
	beginning inventory increases by $ 280000
	We know, Cost of Goods sold = Beginning Inventory + Purchase - Ending Inventory
	Therefore, increase in the beginning inventory will result in increase in Cost of Goods sold
	and Decrease in Net Income by $ 280000
	However, because of this increase, Tax Expense of $ 56000 (i.e., $ 280000 x 20%)
	got decreased.
	Therefore, cumulative effect would be decrease in net income by $ 224000

11)	Cost of the machine			$ 900,000.00
	Useful Life			10	years
	Depreciation expense per year			$   90,000.00
	Computation of Book Value as on Jan 1, 2022
	Cost of the machine			$ 900,000.00
Less:	Accumulated depreciation			$ 360,000.00
	(for 4 years)
	Book Value			$ 540,000.00
	Computation of Depreciation Expense relevant from Dec 31, 2022
	Book Value of the machine			$ 540,000.00
	Revised remaining useful life			11	(15 years - 4 years)
	Depreciation Expense			$        49,091