During 2012, Kramer Company determined, based on new information, that equipment previously depreciated using a ten-year life and a salvage value of $100, 000 had a total estimated life of only six years and a salvage value of $50, 000.The equipment was acquired on January 1, 2010, and was depreciated using the straight-line method.Kramer made an accounting change in 2012 to reflect this additional information, and the change was approved by the IRS.Kramer has an income tax rate of 30%.Assuming Kramer's income before depreciation, before income taxes, and before any retroactive effect of the accounting change (if any)for the year ended December 31, 2012, was $180, 000, Kramer's net income for 2012 should be
A)$80, 000
B)$67, 500
C)$56, 000
D)$47, 250

Question

Quizplus · Accepted Answer

The original depreciation per year was calculated based on a 10-year life and a $100,000 salvage value, resulting in an annual depreciation of $90,000 over 10 years, or $9,000 per year for 2010 and 2011. With the new information in 2012, the total estimated life is now 6 years with a $50,000 salvage value, leading to a revised depreciation calculation. The equipment's cost minus the new salvage value, divided by the new life expectancy, results in a higher annual depreciation expense. The adjustment also requires accounting for the two years already depreciated under the old schedule. The net income calculation for 2012 must reflect the increased depreciation expense for that year, the catch-up depreciation for the previous two years, and the tax effect of these changes. The correct answer accounts for these adjustments and the tax impact, leading to the lowest net income figure among the options provided.

During 2012, Kramer Company Determined, Based on New Information, That