On January 1, 2005, JME Corporation changed from the straight line method to an accelerated method of depreciation. Under the accelerated method, the accumulated depreciation through December 31, 2004, was $600,000 higher than if the straight line method had been used. JME’s income tax rate is 40 percent. What is the cumulative effect of this change in accounting principle? A) $240,000. B) $360,000. C) $600,000. D) $0. Your answer: A was incorrect. The correct answer was B) $360,000. 600,000 × (1 – 0.4) = 360,000 ************ wat is the reasoning behind calculating the after tax effect of the depreciation?
Because NI would decrease by this much. You got $600k additional depreciation. For example, assume your sales were $10,000,000, CGS $6,000,000, and old depreciation expense of $400,000, then old NI (before taxes) = $10,000,000 - $6,000,000 - $400,000 = $3,600,000. Tax = $3,600,000 * 0.40 = $1,440,000, and NI = $2,160,000. Now that you have an additional $600,000 od depreciation, you just need to subtract $600,000 (1-0.40) = $360,000 from NI, to get a new NI = $1,800,000. Do it again (to check your numbers) using the correct depreciation of $1,000,000 ($600k + $400k). Dreary