Question

On January 1, 2019, Crane Co., purchased a machine (its only depreciable asset) for $780000. 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, 2022, for financial statement reporting, Crane decided to change to the straight-line method for depreciation of the machine. Assume that Crane can justify the change.

Crane's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2022, is $630000. The income tax rate for 2022, as well as for the years 2019-2021, is 30%. What amount should Crane report as net income for the year ended December 31, 2022?

Answer 1

Ans:

As per sum of year digit method; Depreciation rates will be :

Asset purchased as on Jan 1, 2019 = $780,000

Asset Life : 5 Years

Sum of Digits : 1+2+3+4+5 = 15

Year 1 : 5/15 = 33.33%

Year 1 Depreciation : $780,000 * 5/15 = $260,000

Year 2 = 4/15 = 26.66%

Year 2 Depreciation : $780,000 * 4/15 = $208,000

Year 3 = 3/15 = 20.00%

Year 3 Depreciation : $780,000 * 3/15 = $156,000

Depreciation charged for 3 years : $260,000 + $208,000 + $156,000 = $624,000

Depreciation for 4 years as per straight line method :

$780,000 * 4/5 = $624,000

So net depreciation expense to be charged for the year 4 : $624,000 - $624,000

Net income before taxes : $630,000

Tax rate : 30%

Net income after Tax : $630,000 * (70%) = $441,000

*Please note that if straight line method to be used from year 4 only, than depreciation expense for year 4 will be :

($780,000 - $624,000)/2 = $78,000. Remaining workings to be done accordingly.

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