Question

Problem 11-10 Accounting changes; three accounting situations [LO11-2, 11-5, 11-6] 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

Requirement 2

1. No accounting entry is required for change as there is change in accounting estimate.
2. Prior Years depreciation = (11,700,000/40)X 3 years = $ 877,500

Remaining years would be 25 years

The adjusting entry would be

Date	Particulars	Debit ($)	Credit ($)
	Depreciation ( 11,700,000-877,500)/25	432,900
	Accumulated depreciation		432,900
	(To record adjusting entry for depreciation)

3. No entry would be required as a direct change due to change in estimate.
4. Sum of digits = (10*11)/2 = 55

2014 depreciation 825,000 X 10/55	150,000
2015 depreciation 825,000 X 9/55	135,000
2016 depreciation 825,000 * 8/55	120,000
2017 depreciation 825,000 X 7/55	105,000
	510,000
Depreciation expense = (825,000 – 510,000)/6	52,500

Date	Particulars	Debit ($)	Credit ($)
	Depreciation	52,500
	Accumulated depreciation		52,500
	(To record adjusting entry for depreciation)

5.

No entry would be required as the change would impact the new acquisition of buildings and equipment only.