Question

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2018 before any adjusting entries or closing entries are prepared. a. On December 30, 2014, Rival Industries acquired its office building at a cost of $11,700,000. It has been depreciated on a straight- line basis assuming a useful life of 40 years and no residual value. Early in 2018, the estimate of useful life was revised to 28 years in total with no change in residual value. b. At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $825,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the sum-of-the-years'-digits method. On January 1, 2018, the company changed to the straight-line method. c. At the beginning of 2018, Jantzen Specialties, which uses the sum-of-the-years'-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net income by $615,000. 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 2018 related to the situation described. (Ignore income tax effects.)

Answer 1

Situation a)

1. Type of change : It is the change in accounting estimates.

2.1. No entry is required to record this change.

2.2. Adjusting Entry for this situation is:

Date	Particulars	Debit	Credit
	Depreciation Expense	$ 432,900
	To Accumulated Depreciation		$432,900

Calculation of depreciation after the change of estimate

Cost of office building = $ 11,700,000

Previous Years Total Depreciation

Depreciation = Cost - Residual Value / Useful life = $11,700,000 / 40 years = $ 292,500

Depreciation of 3 years = $ 292,500 * 3 = $ 877,500

Now Remaining Cost after depreciation for 2018 = $ 11,700,000 - $ 877,500 = $10,822,500

Estimated remaining life = (28-3) = 25 Years

New annual Depreciation = Remaining Cost / Remaining useful life = $ 10,822,500 /25 = $432,900

Also a note is to be disclosed regarding the change in estimate on net income and related earnings per share of the current period.

Situation b)

1. Type of change : It is the change in accounting principle which is accounted for as change in estimates only.

2.3. No entry is required to record this change as this is treated as change in estimate.

2.4. Adjusting Entry for this situation is:

Date	Particulars	Debit	Credit
	Depreciation Expense	$52,500
	To Accumulated Depreciation		$52,500

Calculation of depreciation after the change of estimate

The sum of digits in 10 years = 1+2+3+4+5+6+7+8+9+10 = 55 (It will be denominator)

2014	Depreciation	$150,000	$825000 * 10/55
2015	Depreciation	$135,000	$825000 * 9/55
2016	Depreciation	$120,000	$825000 * 8/55
2017	Depreciation	$105,000	$825000 * 7/55
	Accumulated Depreciation	$510,000

Now Remaining Cost after depreciation for 2018 = $ 825,000 - $ 510,000 = $315,000

Estimated remaining life = (10-4) = 6 Years

Since the residual value is not given it is assumed to be 0.

New annual Depreciation by Straight Line Method = Remaining Cost / Remaining useful life = $ 315,000 / 6 = $ 52,500

Also a note is required to disclose the effect of change in estimate on net income and related earnings per share with the justification for change in method of charging depreciation.

Situation c)

1. Type of change : It is the change in accounting principle which is accounted for as change in estimates only.

2.5. No entry is required .

In this situation there will no impact on depreciation amount of prior periods as this change will not affect the assets purchased in prior period , it will apply only on the assets newly purchased i.e after the date of change.

Also a note is required to disclose the effect of change in estimate on net income that the income is increased by $ 615,000 and related earnings per share with the justification for change in method of charging depreciation.