A private jet manufacturing company extended the useful lives of its Jet x-12 from 16 years to 20 years. As a result, depreciation and amortization expense was decreased by $9,000,000.

The companys financial statements also contained the data below:

• depreciation expense, $235,518,000
• net income, $42,233,000.

The cost of the Jet x-12 jet subject to depreciation was $800 million.

Residual values were predicted to be 10% of acquisition cost.

Assume a combined federal and state income tax rate of 46% throughout all parts of these requirements.

Required

1. Was the effect of the change in estimated useful life a material difference? Explain, including computations.

2. Examination of the annual report of a competitor airline indicated that the competitor used a 10-year life.

Suppose the company making the change in estimate had changed to a 10-year

life instead of a 20-year life on its Jet x-12. Estimated residual value is 10%.

Compute the new depreciation and net income. For purposes of this requirement, assume that the equipment cost $800 million and has been in service 1 year and that reported net income based on a 20-year life was $42,233,000.