In: Accounting
Described below are three independent and unrelated situations
involving accounting changes. Each change occurs during 2021 before
any adjusting entries or closing entries are prepared.
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 2021
related to the situation described. (Ignore income tax
effects.)
Answer:
Situation 1:
Type of Change:- Change in Accounting Estimate.
Change :- Change in Account of Depreciation can be observed
Previous Depreciation :- $ 12,600,000 / 40 Years = $ 315,000
Depreciate withsame amount par 3 years :
The Book Value = $ 12,600,000 - $ 945,000 = $ 11,655,000
New Depreciation :- Remaining Book Value / Life time left
$ 11,655,000 / 25 years = $ 466,200
Journal Entry at the end of the year 2021 :
Depreciation A/c Dr $ 466,200
To Accumulated Depreciation A/c $ 466,200
Situation 2:
Type of Change:- Change in Accounting Principle.
From straight line method to double declining Method.
Change :- Change in Account of Depreciation can be observed
Previous Depreciation :- $ 880,000 / 10 Years = $ 88,000
New Depreciation :- [($ 880,000 - $ 352,000)/6 years]*2 = $176,000
Thus, the amount of depreciation changed will be more and the asset would come to zero book value in just 3 years.
Journal Entry at the end of the year 2021 :
Depreciation A/c Dr $ 176,000
To Accumulated Depreciation A/c $ 176,000
Situation 3:
Type of Change:- Change in Accounting Principle.
From straight line method to double declining Method.
Change :- Change in Account of Depreciation can be observed
Such Change reduced net income by $ 625,000
Therfore, the original depreciation was $ 625,000 but due to change in method it has gone to $ 625,000 * 2 = $ 1,250,000
New Journal Entry at the end of the year 2021 :
Depreciation A/c Dr $ 1,250,000
To Accumulated Depreciation A/c $ 1,250,000
(Being Method of Depreiation Changed from Straight Line Method to Double Declining Method)