On January 1, 2016, Nobel Corporation acquired machinery at a cost of $1,600,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2019, a decision was made to change to the double-declining balance method of depreciation for this machine.

Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is:

(A) $179,200
(B) $0
(C) $210,560
(D) $300,800.

(C) $210,560

Explanation:

Cost of Machinery = $1,600,000

Useful life = 10 years

Residual value = 0

Depreciation on straight line basis = ( $1,600,000 - 0 ) / 10 = $160,000 per year

Straight line depreciation rate = 10%

Double Declining rate = 10% x 2 = 20%

At the beginning of 2019:

Straight Line Method:

Accumulated depreciation  = Per year Depreciation x Time period

Accumulated depreciation = $160,000 x 3 years

Accumulated depreciation  = $480,000

Net of tax Accumulated depreciation  = $480,000 x ( 1 - 0.3 ) = $336,000

Double Declining Method:

                          2016               2017           2018

Cost / Balance 1,600,000    1,280,000  1,024,000

Depreciation      320,000      256,000     204,800  = 780,800

Net of Tax Accumulated depreciation = 780,800 x ( 1- 0.3 ) = $546,560

Net effect to retained earning = 546,560 - 336,000 = $210,560

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