Question

During 2016 and 2017, Faulkner Manufacturing used the sum-of-the-years’-digits (SYD) method of depreciation for its depreciable assets, for both financial reporting and tax purposes. At the beginning of 2018, Faulkner decided to change to the straight-line method for both financial reporting and tax purposes. A tax rate of 40% is in effect for all years. For an asset that cost $16,000 with an estimated residual value of $1,000 and an estimated useful life of 10 years, the depreciation under different methods is as follows: Year Straight Line SYD Difference 2016 $ 1,500 $ 2,727 $ 1,227 2017 1,500 2,455 955 $ 3,000 $ 5,182 $ 2,182 Required: 1. Prepare the journal entry that Faulkner will record in 2018 related to the change. 2. Suppose instead that Faulkner previously used straight-line depreciation and changed to sum-of-the-years’- digits in 2018. Prepare the journal entry that Faulkner will record in 2018 related to the change.

Answer 1

The answers are given below.Thanks.

Faulker Manufacturing
Part 1
The change in depreciation method from STD to straight line is
considered a change in estimate and handled prospectively
In 2018 the remaining book value =$16000-$5182=$10818
Remaining Life=8 years (10-2)
Residual value =$1000
Straight line depreciation ($10818-$1000)=$1227
Date	Account Title and Explanation		Debit	Credit
	Depreciation Expense A/C		$1,227
	Accumulated Depreciation			$1,227
The footnote disclosure would provide justification for the change and describe
the effect of the change on any financial statement line items and EPS amounts
affected for all periods reported
Part2
2018 book value =$16000-$3000		$13,000
Remaining Life		8 Years(10-2)
Residual Value		$1,000
SYD denominator		n*(n+1)/2
		(8*9)/2
		36
SYD depreciation		($13000-$1000)*(8/36)
		$2,667
Date	Account Title and Explanation		Debit	Credit
	Depreciation Expense A/C		$2,667
	Accumulated Depreciation			$2,667
The footnote disclosure would provide justification for the change and
describe the effect of the change on any financial statement line items and EPS amounts
affected for all periods reported