Let's analyze the problem step by step: **Given:** - Change in depreciation method: from double-declining balance (DDB) to straight-line. - Change in accumulated depreciation as of Jan 2, 2024: **$49,000**. - Tax rate: **25%**. - The change in 2024 earnings reported separately. --- ### Step 1: Understand the impact of the change on pretax income Switching from DDB to straight-line depreciation **reduces** depreciation expense (since DDB is more accelerated early on), which **increases** pretax income. - The change in accumulated depreciation of **$49,000** reflects the **cumulative difference** in depreciation expense recognized due to the change. ### Step 2: Determine the effect on pretax income - Since the change results in **less depreciation expense** (because straight-line is spread evenly), it causes an **increase** in pretax income by **$49,000**. ### Step 3: Calculate the impact on after-tax income - Tax effect: \( \text{Increase in pretax income} \times (1 - \text{tax rate}) \) - Tax rate = 25% or 0.25. - After-tax impact: \( 49,000 \times (1 - 0.25) = 49,000 \times 0.75 = 36,750 \). **Note:** The question asks for the **separately reported change in 2024 earnings**, which is **after-tax**. --- ### **Answer:** **The change in earnings is an increase of $36,750.** Matching this to the options: > **an increase of $36,750** --- ## **Final answer:** **Multiple Choice:** - **an increase of $36,750**

**Sub-subject:** Financial Accounting **Topic:** Accounting Changes – Change in Depreciation Method and Its Reporting --- ## 1: Conceptual Foundation A change in depreciation method, such as from double-declining-balance (DDB) to straight-line, is considered a change in accounting estimate effected by a change in accounting principle. According to U.S. GAAP (ASC 250), such changes are accounted for prospectively, but the cumulative effect up to the date of change is adjusted, and the difference in accumulated depreciation is recognized in the current period's income. The impact on earnings must be presented net of tax in the income statement, often as a separately reported item if material. The after-tax impact is determined by adjusting the pre-tax amount by the applicable tax rate, ensuring the reported earnings reflect the true economic effect on the company. **Explanation:** Understanding the treatment of changes in depreciation methods is crucial because it directly impacts the measurement of net income and the presentation of comparative financial statements. Recognizing the difference in accumulated depreciation and adjusting for tax effects ensures accurate and transparent financial reporting, enabling stakeholders to properly interpret changes in reported earnings. --- ## 2: Presentation of Relevant Formulas **Formulas Required:** 1. **After-tax effect of change:** \[ \text{After-tax effect} = \text{Cumulative change in depreciation} \times (1 - \text{Tax rate}) \] 2. **Tax effect calculation:** \[ \text{Tax effect} = \text{Cumulative change in depreciation} \times \text{Tax rate} \] **Explanation:** The first formula calculates the actual impact of the accounting change on net earnings after considering the tax shield lost or gained from the difference in depreciation expense. The second formula is used to determine the tax effect itself, which is important for reconciling gross (pre-tax) and net (post-tax) effects. These formulas ensure the net impact of the accounting change is accurately quantified and reported. --- ## 3: Detailed Step-by-Step Solution ### Step 1: Identify the Cumulative Change in Depreciation - **Given:** Cumulative change in accumulated depreciation as of January 2, 2024 = **$49,000**. - This figure represents the cumulative difference in depreciation expense resulting from the change in method. **Explanation:** Recognizing the cumulative change is necessary because it quantifies the total impact on earnings up to the date of the change. This amount forms the basis for subsequent tax and net income adjustments. --- ### Step 2: Calculate the After-tax Effect - **Tax rate:** 25% (or 0.25) - **After-tax effect calculation:** \[ \text{After-tax effect} = \$49,000 \times (1 - 0.25) = \$49,000 \times 0.75 = \$36,750 \] **Explanation:** Multiplying the pre-tax change by (1 - tax rate) yields the net increase in earnings attributable to the change, as only the after-tax portion affects net income. This is standard practice in financial reporting to present the net effect of a change after considering the related tax impact. --- ### Step 3: Determine the Direction of the Change in Earnings - Since the company switched from an accelerated method (DDB) to straight-line, depreciation expense is **lower**, and thus, income is **higher**. - The effect is an **increase** in earnings. **Explanation:** The direction of the change is important for correctly reporting the effect on earnings. Because the straight-line method defers less expense compared to DDB (which is front-loaded), switching to straight-line increases current period earnings by the cumulative difference. --- ## Conclusion **The separately reported change in 2024 earnings is an increase of $36,750.** This corresponds to the option: **"an increase of $36,750."**