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AICPA CPA-Financial Exam - Topic 1 Question 130 Discussion

On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X3, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500 during 20X3.Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements as a(n):
D) None of the above.
A) Cumulative effect of a change in accounting principle of $2,000 in its income statement.
B) Adjustment to beginning retained earnings of $2,000.
C) Cumulative effect of a change in accounting principle of $1,400 in its income statement.

AICPA CPA-Financial Exam - Topic 1 Question 130 Discussion

Actual exam question for AICPA's CPA-Financial exam
Question #: 130
Topic #: 1
[All CPA-Financial Questions]

On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X3, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500 during 20X3.

Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements as a(n):

Show Suggested Answer Hide Answer
Suggested Answer: D

Choice 'd' is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.

The cumulative effect treatment on the income statement was the treatment of most changes in accounting principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now given to changes in accounting principle by SFAS No. 154. However a change in depreciation method is no longer accounted for as a change in accounting principle.

Choices 'a', 'b', and 'c' are incorrect, per the above Explanation: .


by Lorean at Jul 21, 2026, 08:28 PM

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Blair
1 day ago
Not sure about that $1,400 option, seems off to me.
upvoted 0 times
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Lenita
6 days ago
I agree, it should be reported as a cumulative effect.
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Rene
11 days ago
Wait, how does that $2,000 figure even come up?
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Elvera
17 days ago
I think it's definitely an adjustment to retained earnings.
upvoted 0 times
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Phil
22 days ago
The straight-line method was used for 2 years before the change.
upvoted 0 times
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Daren
27 days ago
I’m leaning towards option A, but I’m not entirely confident. I think we need to consider the tax impact on the cumulative effect as well.
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Una
1 month ago
I feel like the cumulative effect should be calculated based on the difference in depreciation from the straight-line to units of production method, but I can't remember the exact figures.
upvoted 0 times
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Jettie
1 month ago
I think we practiced a similar question where we had to adjust for cumulative effects. If I recall correctly, it might be related to the difference in depreciation expense over the years.
upvoted 0 times
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Dolores
1 month ago
I remember we discussed how changes in depreciation methods can affect retained earnings and income statements, but I'm not sure about the exact calculation here.
upvoted 0 times
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