On January 1, Year 1, the Dole Company purchased an asset that cost $154,000. The asset had an expected useful life of seven years and no estimated residual value. The company initially decided to use sum-of-the-years'-digits (SYD) depreciation for both financial accounting and income tax purposes. Depreciation expense for the straight-line method and the sum-of-the-years'-digits method is as follows:

Question

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Straight-line
SYD over
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Year
over 7 Years
7 Years
Difference
1
$ 22,000
$ 38,500
$ 16,500
2
   22,000
   33,000
11,000
3
   22,000
   27,500
5,500
4
   22,000
   22,000
0
5
   22,000
   16,500
(5,500)
6
   22,000
   11,000
(11,000)
7
   22,000
    5,500
(16,500)
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$154,000
$154,000
$          0
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At the beginning of Year 4, Dole changed from the sum-of-the-years'-digits method to the straight-line method of depreciation for financial reporting purposes. The company's income tax rate is 30%. In Year 3 and Year 4, Dole had $90,000 pretax income before depreciation and income taxes.
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Required:
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a.
Complete the following section of the income statement:
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Year 3
Year 4
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Pretax income before depreciation
$90,000
$90,000
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Depreciation expense
_______
_______
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Income before income taxes
_______
_______
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Income tax expense
_______
_______
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Net income
_______
_______
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b.
Prepare the journal entries to record the depreciation expense, tax expense, and the effect of the accounting change (if any) in Year 4.

What will be an ideal response?

Answer 1