Question

In: Accounting

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2021...

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.

  1. On December 30, 2017, Rival Industries acquired its office building at a cost of $12,600,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2021, the estimate of useful life was revised to 28 years in total with no change in residual value.
  2. At the beginning of 2017, the Hoffman Group purchased office equipment at a cost of $880,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the straight-line method. On January 1, 2021, the company changed to the double-declining-balance method.
  3. At the beginning of 2021, Jantzen Specialties, which uses the straight-line method, changed to the double-declining-balance method for newly acquired vehicles. The change decreased current year net income by $625,000.


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 2021 related to the situation described. (Ignore income tax effects.)

Solutions

Expert Solution

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)


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