During 2016, Dragon 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, 2014 at a cost of $600,000, and was depreciated using the straight-line method. Dragon made an accounting change in 2016 to reflect this additional information, and the change was approved by the IRS. Dragon has an income tax rate of 30%. Assuming Dragon's income before depreciation, before income taxes, and before any retroactive effect of the accounting change (if any) for the year ended December 31, 2016, was $180,000, Dragon's net income for 2016 should be
A) $80,000
B) $67,500
C) $56,000
D) $47,250

Question

Quizplus · Accepted Answer

The change in depreciation is a change in estimate, not a change in accounting principle, so it is applied prospectively. The new depreciation expense for 2016 is calculated using the revised life and salvage value. The net income is calculated by subtracting the new depreciation expense and taxes from the income before depreciation and taxes.

During 2016, Dragon Company Determined, Based on New Information, That