- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 3. Depreciation Methods
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) ? |