The Zack Company began its operations on January 1, 2010, and used an accelerated method of depreciation for its machinery and equipment.On January 1, 2012, Zack adopted the straight-line method of depreciation.The following information is available regarding depreciation expense for each method: $\begin{array}{rrr}
&\text { Accelerated}&\text { Straight-line}\
\text { Year }&\text { Depreciation}&\text { Depreciatior}\
2010 & \$ 75,000 & \$ 50,000 \
2011 & 100,000 & 80,000 \
2012 & 145,000 & 130,000
\end{array}$
What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2012, due to changing to a different depreciation method?
A)$0
B)a decrease of $45, 000
C)an increase of $45, 000
D)an increase of $60, 000

Question

The Zack Company began its operations on January 1, 2010, and used an accelerated method of depreciation for its machinery and equipment.On January 1, 2012, Zack adopted the straight-line method of depreciation.The following information is available regarding depreciation expense for each method: $\begin{array}{rrr}
&\text { Accelerated}&\text { Straight-line}\ 
\text { Year }&\text { Depreciation}&\text { Depreciatior}\
2010 & \$ 75,000 & \$ 50,000 \
2011 & 100,000 & 80,000 \
2012 & 145,000 & 130,000
\end{array}$
 What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2012, due to changing to a different depreciation method?
A)$0
B)a decrease of $45, 000
C)an increase of $45, 000
D)an increase of $60, 000

Quizplus · Accepted Answer

Based on the information given in the chart, the total depreciation expense recorded under the accelerated method for 2010 and 2011 is $105,000 (45,000 + 60,000). If the straight-line method had been used during these years, the total depreciation expense would have been $60,000 (30,000 + 30,000). Therefore, as of January 1, 2012, there is an increase of $45,000 ($105,000 - $60,000) in accumulated depreciation due to the change in depreciation method. This increase in accumulated depreciation results in an increase in net income for prior years of $45,000, which would be reported as a cumulative effect on the income statement.

The Zack Company Began Its Operations on January 1, 2010