单选题

Question
The following information has been gathered regarding Williams Investing, which uses the
straight-line method for depreciation.
Depreciable life of 8 years on its assets.
Net book value of assets is $ 40 million.
Accumulated depreciation is $ 28 million.
Salvage value is $12 million.
It recently revised the estimates for the remaining useful life of its assets from 4 years to 6 years.
Net income before the change is $13 million. The effective tax rate for the firm is 40 percent.

单选题 Depreciation expense for Williams Investing will decrease by:

A、

A. $ 2.3 million.
B、

B. $ 3.6 million.
C、

C. $ 1.4 million.

【正确答案】 A

【答案解析】To find the change in depreciation we have to find the annual depreciation with the original assumptions and the annual depreciation going forward with the new assumptions. First find the original cost of the assets = $ 40 book value + $ 28 accumulated depreciation = $68. Original depreciation per year = ( $68 original cost- $12 salvage value)/8 years = $ 56/8 years = $ 7 depreciation per year. New depreciation = ( $ 40 book value - $12 salvage)/6 years = $ 4.7 The change in depreciation = $ 7 - $ 4.7 = $ 2.3 less, or a decrease of $ 2.3

单选题 Net income for Williams Investing will increase by:

A、

A. 13.85%.
B、

B. 10.62%.
C、

C. 15.39%.

【正确答案】 B

【答案解析】Net income will increase by 2.3 (1-0.4) = $1.38 million or on a percentage basis = 1.38/13 = 10. 62%.