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 $11 500,000. 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 vears 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 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 ancreased current year net income by $595000 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, Ignare income tax effects Complete this question by entering your answers in the tabs below. Required 1 Required 2 identify the type of change. Type of Change Required 2

Answer 1

a.

This is a change in estimate.

No entry is needed to record the change.

2018 adjusting entry:

Depreciation expense Dr.........................$ 425,500 (Determined Below)

To Accumulated depreciation Cr. ..........................$ 425,500

Cost	$        11,500,000
Previous Depreciation	$              287,500	11500000/40years
Depreciation to Date (2014-2017)	$              862,500	287500*3years	2015-2017
Undepreciated Cost	$        10,637,500	Cost- depreciation to date
Estimated Remaining Life	25 years	Revised Estimate- years depreciated	(28 -3)years
New Annual Depreciation	$              425,500	Undepreciated Cost / Estimated Remaining Life

• 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.

b.

This is a change in accounting principle that is accounted for as a change in estimate.

Depreciation expense Dr.........................$ 49000 (Determined Below)

To Accumulated depreciation Cr. ..........................$ 49000

Cost	$              770,000
Sum of Years Digit Depreciation
2014	$              140,000	770000*10/55
2015	$              126,000	770000*9/55
2016	$              112,000	770000*8/55
2017	$                98,000	770000*7/55
Accumulated Depreciation	$              476,000
Cost	$              770,000
Depreciation to Date (2014-2017)	$              476,000	Accumulated Depreciation calculated above
Undepreciated Cost	$              294,000	Cost- depreciation to date
Estimated Remaining Life	6 Years	(10-4) years
New Annual Depreciation	$                49,000	Undepreciated Cost / Estimated Remaining Life

• A disclosure note reports the effect of the change on net income and earnings per share along with clear justification for changing depreciation methods.

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.