The Max Company began its operations on January 1, 2016, and used an accelerated method of depreciation for its machinery and equipment. On January 1, 2018, Max adopted the straight-line method of depreciation. The following information is available regarding depreciation expense for each method: $$\begin{array} { l r r }
\text { Year } & \begin{array} { r }
\text { Accelerated } \
\text { Depreciation }
\end{array} & \begin{array} { r }
\text { Straight-line } \
\text { Depreciation }
\end{array} \\hline
2016 & \$ 175,000 & \$ 150,000 \
2017 & 200,000 & 180,000 \
2018 & 245,000 & 230,000
\end{array}$$ What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2018, 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 Max Company began its operations on January 1, 2016, and used an accelerated method of depreciation for its machinery and equipment. On January 1, 2018, Max adopted the straight-line method of depreciation. The following information is available regarding depreciation expense for each method: $$\begin{array} { l r r } 
\text { Year } & \begin{array} { r } 
\text { Accelerated } \
\text { Depreciation }
\end{array} & \begin{array} { r } 
\text { Straight-line } \
\text { Depreciation }
\end{array} \\hline
2016 & \$ 175,000 & \$ 150,000 \
2017 & 200,000 & 180,000 \
2018 & 245,000 & 230,000
\end{array}$$ What is the before-tax cumulative effect on prior years' income that would be reported as of January 1, 2018, 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

When a company changes its depreciation method, it applies the change prospectively, not retrospectively. This means that the cumulative effect of the change on prior years' income is not adjusted; instead, the new method is applied going forward from the date of the change. Therefore, there is no cumulative effect on prior years' income reported due to changing the depreciation method.

The Max Company Began Its Operations on January 1, 2016