Use the following data to answer questions 5 through 9:
Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of $1,800,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of $150,000. The current year end is 12/31/15. Davis records depreciation to the nearest month.
-If Davis expensed the total cost of the equipment at 7/1/14, what was the effect on 2014 and 2015 income before taxes, assuming Davis uses straight-line depreciation?
A) $1,470,000 understated and $330,000 overstated.
B) $1,620,000 understated and $180,000 overstated.
C) $1,635,000 understated and $330,000 overstated.
D) $1,800,000 understated and $180,000 overstated.

Question

Quizplus · Accepted Answer

Davis expensed the total cost of the equipment at 7/1/14, so there was no depreciation expense recorded in 2014. The correct depreciation expense for 2014 is $330,000 ($1,800,000 - $150,000) / 5 * 6/12. The correct depreciation expense for 2015 is $330,000 ($1,800,000 - $150,000) / 5 * 12/12. Therefore, the effect on 2014 income before taxes is $330,000 understated, and the effect on 2015 income before taxes is $330,000 overstated.

Use the Following Data to Answer Questions 5 Through 9