Question

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2021 before any adjusting entries or closing entries are prepared. a. On December 30, 2017, Rival Industries acquired its office building at a cost of $10,800,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2021, the estimate of useful life was revised to 28 years in total with no change in residual value. b. At the beginning of 2017, the Hoffman Group purchased office equipment at a cost of $504,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the straight-line method. On January 1, 2021, the company changed to the double-declining-balance method. c. At the beginning of 2021, Jantzen Specialties, which uses the straight-line method, changed to the double-declining- balance method for newly acquired vehicles. The change decreased current year net income by $525,000. Required: 1. Identify the type of change. 2. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2021 related to the situation described. (Ignore income tax effects.) Complete this question by entering your answers in the tabs below. Required Required 1 Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2021 related to the situation described. (Ignore income tax effects.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Show less View transaction list Journal entry worksheet < 1 2 3 4 5 Record the entry necessary as a direct result of the change in situation a. Note: Enter debits before credits. General Journal Debit Credit Date 2021 Record entry Clear entry View general journal

2nd Journal entry: Record the adjusting entry for situation a.

3rd Journal entry: Record the entry necessary as a direct result of the change in situation b.

4th Journal entry: Record the adjusting entry for situation b.

5th Journal entry: Record the entry necessary as a direct result of the change in situation c.

Answer 1

PART – a)

It is the change in estimate. In such case, the disclosure note should be provided on the net income, retained earnings, and extraordinary items. Thus, no entry is needed.

Depreciation of previous year = (Cost/Useful life)*Years till building used

                                                 = ($10,800,000/40 years)*3 years

                                                 = $810,000

Current depreciation for 2021 = (Cost – Depreciation for previous years)/Remaining life

                                                 = ($10,800,000 – $810,000)/(28 – 3) years

                                                 = $9,990,000/25 years

                                                 = $399,600

Entry:

Depreciation A/c                                             Dr. $399,600

         To Accumulated depreciation A/c                                    Cr. $399,600

(Being depreciation charged)

PART – b)

It is the change in the accounting principle and thus accounted as the change in the estimate. It requires disclosure note for the effect on the retained earnings, net income with the justification of the new method.

Depreciation of previous years = (Cost/Useful life)*Years till equipment used

                                                  = ($504,000/10 years)*4 years

                                                  = $201,600

Depreciation rate as per new method = 100/6

                                                            = 16.67%

Depreciation for 2021 = (Cost – Depreciation of previous years)*16.67%

                                    = ($504,000 – $201,600)*16.67%

                                    = $302,400*16.67%

                                    = $50,400

Entry:

Depreciation A/c                                             Dr. $50,400

         To Accumulated depreciation A/c                                    Cr. $50,400

(Being depreciation charged)

PART – c)

It is the accounting principle change and thus accounted for as change in estimate. It doesn’t require any entry even for depreciation as the change is implied on new assets and thus current year depreciation will not affected. It requires disclosure note for the effect on the retained earnings, net income with the justification of the new method.