Corriveau Industries Decided to Switch from an Accelerated Depreciation Method

question 49

Essay

Corriveau Industries decided to switch from an accelerated depreciation method to a straight-line method in the second quarter of 20X1. This is classified as a cumulative effect of a change in accounting principle. The first-quarter, pretax income reported was $30,000, and projected pretax income for 20X1 was $90,000. If Corriveau had used straight-line depreciation for the quarter, pretax income would have been $35,000 and projected pretax income for 20X1 would have been $110,000. The cumulative effect on prior years from the change is a $50,000 increase in retained earnings. The second-quarter income using straight-line depreciation is $20,000, and the expected annual earnings continue to be $110,000. Assume that Corriveau is subject to a flat 25% statutory tax rate for 20X1. Corriveau is expecting $5,000 of tax-free income during the third and fourth quarters of 20X1.
Required:
For all categories of income, calculate the interim tax expense for the first quarter, first quarter restated, and second quarter.

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Definitions:

Sunk Cost

Costs that have already been incurred and cannot be recovered or altered and should not affect future business decisions.

Net Book Value

The value at which an asset is carried on a balance sheet, essentially the cost of the asset minus accumulated depreciation.

Equipment Rental

The process of leasing machinery or equipment for a specific period instead of purchasing it outright.

Markup Per Unit

The sum added to the purchase price of products to account for operational costs and earnings.