Question

18. On 30 June 2019, the end of the current reporting period, Kirk Ltd made a decision, using the information obtained over the past few years, to revise the useful life of acquired five years earlier on 1 July 2014 for $1 000 000. The useful life was revised from ten years to 15 years. The building was originally depreciated on the straight-line basis over its useful life and it was expected that the building would have no residual value. No depreciation has been provided in the current period.

REQUIRED

Prepare the journal entry to account for the change in accounting estimate.

Assuming that the change in accounting estimate had a material effect on financial performance for the period, prepare an appropriate supporting note.

Answer 1

Date	Accounts Title & Explanation	Debit	Credit
2019
June 30	Depreciation Expense-Building	$54545.45
	Accumulated Dep.-Building		$54545.45
	(For recording depreciation expense for the year)

Explanation;

Depreciation for the year will be calculated as follow;

Original annual depreciation was;

($1000000 - $0) / 10 = $100000

From July 1, 2014 – June 30, 2018, total accumulated depreciation was;

($100000 * 4) = $400000

Thus book value as on June 30, 2018 was ($1000000 - $400000) = $600000

New remaining useful life will be (15 – 4) = 11 years

Thus annual depreciation will be ($600000 / 11) = $54545.45

As it is given that change in accounting estimate had a material effect on financial performance for the period hence this information will be disclosed in the financial statement as a note;

As a note we have to disclosed about the original useful life and revised useful life of the building so that users can understand more accurately about the sudden decrease in depreciation expenses.