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.

1. On December 30, 2014, Rival Industries acquired its office building at a cost of $9,600,000. It has been depreciated on a straight-line basis assuming a useful life of 30 years and no residual value. Early in 2018, the estimate of useful life was revised to 18 years in total with no change in residual value.
2. At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $576,000. Its useful life was estimated to be 8 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.
3. 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 $565,000.

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

(A)

PART 1:- This is a change in estimate.

PART 2:- No entry

GIVEN = BUILDING COST=9600,000,USEFUL LIFE=30 YEARS, USEFUL LIFE REVISED=18 YEARS

PRIOR'S YEAR'S DEPRECIATION :- 9600,000 / 30 = 320,000/years *3 years = 960,000

DEPRECIATION EXPENSE(9600,000 - 960,000) / 15) 576,000

ACCUMULATED DEPERECIATION    576000

A Disclosure not should describe the change in estimate on income before extraordinary items, net income and related earnings per share amounts for the current periods.

(B)

PART1:- This is a change in accounting principles that is accounted for as a change in estimate ,

PART 2:- No entry would be required per change the estimate :- (8*11) / 2 =

GIVEN , EQUPIMENT COST=576000, USEFUL LIFE=8 YEARS.

• 2014 DEPRECIATION : 576,000 * 8/ 44=104727
• 2015 DEPRECIATION : 576,000 * 7/ 44=91636
• 2016 DEPRECIATION : 576,000 * 6/ 44=78545
• 2017 DEPRECIATION : 576,000 * 5/ 44=65454

TOTAL=340362

DEPRECIATION EXPENSE{( 576000 - 340362)/ 4}= 58910

ACCUMULATED DEPRECIATION 58910      

A disclosure note reporting the effect of the change in pprinciples on net income and earnings per share is required , along with a justification for the change in the depreciation method.

(C)

PART 1:- This is a change in accounting principle accounted for as a change in estimate.

PART 2:- No entry

No impact on current year depreciation because it only impacts newly acquired buildings and equipment,

A disclosure note should describe the change in estimate on income before extraordinary items, net income and related earnings per share amounts for the current periods,and provide a justification for the change.