CFA Practice Question

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CFA Practice Question

At the end of 2015, a firm changes its depreciation method from the double-declining-balance to the straight-line method. The firm only has one asset, a building that cost $4,000,000 and has a salvage value of $200,000 after a life of 20 years. The tax rate is 20%. The asset was purchased in January of 2013. What will be the cumulative effect of the change on the 2015 depreciation resulting from 2013 and 2014?
A. $210,000 lower
B. $380,000 lower
C. $190,000 lower
Explanation: Depreciation under the straight-line method would be $190,000 each year [($4,000,000 - $200,000)/20]. Depreciation under the double-declining-balance method would be $400,000 in the first year. The double-declining rate is 10% [(100%/20) x 2].

Applying the rate of 10% to the beginning book value of $4,000,000 = $400,000 for the first year. The second year will be the beginning book value of $3,600,000 ($4,000,000 - $400,000) x .1 = $360,000. The difference between $400,000 and $190,000 ($210,000) will be the change in the depreciation expense for 2013. The second year for the straight line is $190,000. The difference between $360,000 and $190,000 ($170,000) will be the change in the depreciation expense for 2014. The cumulative effect of the change for 2015 will be $210,000 + $170,000 = $380,000 lower.

User Contributed Comments 9

User Comment
humphrey so there is no salvage value for the double declining balance method?
sekib In Financial Accounting Text it states pg 471

Estimated residual value is not taken into account in figuring depreciation (for double-decling-balance method
aero WHat about taxes???? I do not need to take it into account?????
hkcfa2 No. You use different accounting methods for financial reporting and tax reporting. here the financial reporting is affected but not the tax reporting,
mbuechs2 The question asks for depreciation which is a pretax figure.
chuong depreciation of 380,000 is overcharged in 1st and 2nd years, then in 3rd year will be reduced (lower) this amount of 380,000
endurance Texas BAII: type 2nd DEPR

1) change to DB, life=20, CST = 4,000,000, SAL=200.000, add year 1 (400,000) and year 2 depr (360,000)= 760.000

2) Change to straight line method, same values entered and add year 1 and year 2 depr (190,000+190,000) = 380,000
The accounting difference is 380,000 = (760,000-380,000)
dream007 not a bad question...but the wording got me messed up...
alles Depreciation will be positive in 2010 (-190+380) ?
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