Question

Check my work 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 $11,500,000. 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 $770,000. 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- < Prev 5 of 7 ! Next >

Answer 1

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Part a
Change in Estimates.
No entry is needed to record change in estimate.
Adjusting Entry for Year 2018:
Account	Debit	Credit
Depreciation expense	$                  425,500
Accumulated depreciation		$           425,500
(To record depreication for Year 2018)
Working:
Cost		$     11,500,000
Previous depreciation ($11,500,000 ÷ 40 years)	$                  287,500
Depreciation to date (For 3 Years 2015-2017)	x 3 yrs	$           862,500
Undepreciated cost		$     10,637,500
Estimated remaining life (28 Year-3 Year)	÷   25 yrs.
New annual depreciation		$           425,500
A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per-share amounts for the current period.
Part b
This is a change in accounting principle that is accounted for as a change in estimate.
Account	Debit	Credit
Depreciation expense	$                     49,000
Accumulated depreciation		$             49,000
(To record depreication for Year 2018)
Depreciation 2014	$770,000*10/55	$           140,000
Depreciation 2015	$770,000*9/55	$           126,000
Depreciation 2016	$770,000*8/55	$           112,000
Depreciation 2017	$770,000*7/55	$             98,000
Accumulated Depreciation		$           476,000
Cost		$           770,000
Less: Depreciation upto 2017		$        (476,000)
		$           294,000
Less residual value		$                      -
Depreciable Value		$           294,000
Remaining Life (10-4 Years)		÷ 6 yrs.
New annual depreciation		$             49,000
A disclosure note reports the effect of the change on net income and earnings per share along with clear justification for changing depreciation methods.
Part c
This is a change in accounting principle accounted for as a change in estimate.
Because the change will be effective only for assets placed in service after the date of change,
depreciation schedules do not require revision because the change does not affect assets depreciated in prior periods.
A disclosure note still is required to provide justification for the change and to report the effect of the change on current year’s income.