Question

Avery Corporation made the following determinations about three depreciable assets:

? Depreciable asset M was purchased on January 1, 2015. The original cost was $114,000 and this amount was entirely expensed in 2015. This particular asset has an 8-year useful life and no salvage value. The straight-line method should have been used for depreciation purposes.

? Depreciable asset N was purchased January 1, 2016. It originally cost $540,000 and, for depreciation purposes, the sum-of-the-years’ digit method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2017, the decision was made to change the depreciation method from sum-of-the-years’ digits to straight-line to better match costs.

Note: The estimates relating to useful life and salvage value remained unchanged.

? Depreciable asset O was purchased January 1, 2013. It originally cost $160,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 8 years and have a zero salvage value. In 2017, the decision was made to extend the total life of this asset to 10 years and to estimate the salvage value at $5,000.

a) Indicate if the situation is a change in accounting principle, a change in accounting estimate or an error in the financial statement. What is the proper accounting treatment (retrospective, restatement, prospective) for each of these assets?

You must support your conclusions with cites to the applicable guidance listed in the FASB Codification. Ignore tax implications and assume all errors are material to the client and require adjustment.

b) What journal entries would be appropriate at 12/31/2017 for each of these assets? Ignore tax implications.

Answer 1

a.

• The action of recording the entire cost of acquiring of asset M into an expense account was an error in the financial statement. According to FASB 250-10-45, “any error in the financial statements of a prior period discovered after the statements are issued or available to be issued shall be reported as an error correction, by restating the prior-period financial statements.
• The change in depreciation method of asset N from sum-of-the-years’ digit method to straight-line method is a change in accounting principle. The change in accounting principle need to be reported through retrospective application (according to 250-10-55-3) (Retrospective Application meaning 250-10-20)
• The increase in the lifetime and salvage value of asset O is a change in accounting estimate. According to FASB 250-10-45-17, “a change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods,” which mean that a change in accounting in estimate need to be reported through prospective application.

b. Journal entry for Asset M:

Date	Particulars	Debit	Credit
1-Jan-17	Equipment	114,000.00
	Accumulated Depreciation		28,500.00
	Retained Earnings		85,500.00

Date	Particulars	Debit	Credit
31-Dec-17	Depreciation expenses	14,250.00
	Accumulated Depreciation		14,250.00

For Asset N:

Date	Particulars	Debit	Credit
31-Dec-16	Depreciation expenses	98,182.00
	Accumulated Depreciation		98,182.00

Value of the assets after 1st year depreciation = 540,000-98,182 = 441,818.

Depreciation = (441818-98182)/9 = 49091

Date	Particulars	Debit	Credit
31-Dec-17	Depreciation expenses	49,091.00
	Accumulated Depreciation		49,091.00

For Asset O:

Date	Particulars	Debit	Credit
31-Dec-13	Depreciation expenses	20,000.00
	Accumulated Depreciation		20,000.00
31-Dec-14	Depreciation expenses	20,000.00
	Accumulated Depreciation		20,000.00
31-Dec-15	Depreciation expenses	20,000.00
	Accumulated Depreciation		20,000.00
31-Dec-16	Depreciation expenses	20,000.00
	Accumulated Depreciation		20,000.00

Value of the asset at the beginning of 2017 = 160,000 - (20,000*4) = 80,000

Salvage value = 5,000. Thus depreciation per year = (80,000-5000)/6 years = 12500

Date	Particulars	Debit	Credit
31-Dec-17	Depreciation expenses	12,500.00
	Accumulated Depreciation		12,500.00