Question

ABC corp acquired a van on January 1, 2016 for $330,000. The company used the sum or years digits method assuming a 4-year useful life and a $10,000 residual value. During 2018 the company decides to change to straight-line depreciation and determines that the useful life of the truck is 6 years (no change to residual value).

a) what depreciation expense should ABC corp recognize in 2018?

b)how will these changes affect net income in 2018 assuming ABC corp pays a 20% tax rate?

Answer 1

Sum of years digits Method
Life in years	4.00
Cost of Asset	330,000.00
Salavge Value	10,000.00
Depreciable Value =	320,000.00
sum of the years' digits depreciation calculation is = n(n+1)/2 = 4(4+1)/2 = 4*5/2 = 20/2 = 10
Year	Depreciation	WN
2,016.00	128,000.00	320,000/10 * 4
2,017.00	96,000.00	320,000/10 * 3
	224,000.00
Balance at beginning of 2018 = 330,000 - 224,000	106,000.00
Remaining life = 6years -2 Years	4.00
Salavge Value	10,000.00
Depreciation expense in 2018 = (106,000 - 10,000)/4	24,000.00
If used sum of years method then dep would be 320,000/10*2	64,000.00
Difference in depreciation = 64000 - 24000	40,000.00
Difference in depreciation net of tax = 40000*.80	32,000.00
Net income would increase by 32000 because of using SLM method