- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 6. Non-Recurring Items and Non-Operating Items
CFA Practice Question
Vince Inc. changed from the double-declining balance to the straight-line method of depreciation during 20x3. Total depreciation expense for previous years under the double-declining balance method totaled $29,000. Vince Inc. calculated that if the straight-line method had been used, depreciation would have totaled $17,000. Vince Inc. is taxed at a rate of 34 percent. What is the cumulative effect of the accounting change that should be reported on Vince's income statement for the year ended 20x3?
A. $7,920
B. $12,000
C. ($12,000)
Explanation: If the new accounting method (straight-line) had been used in previous years, Vince's total depreciation expense would have been $12,000 lower ($29,000 - $17,000) and income before income taxes would have been $12,000 higher. Therefore, the cumulative effect of the accounting change that should be reported on Vince's year-end income statement for 20x3 is a positive $7,920 [$12,000 x (1 - 0.34)].
User Contributed Comments 3
| User | Comment |
|---|---|
| achu | REDUCING current year depreciation will INCREASE net income. |
| surjoy | Also, accounting changes are added net of Tax and hence multiply by 0.66? |
| Andrewua | Accounting change should be reported in both balance and income statement. So we gonna reduce accumulated depreciation and rise income... |