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 $10,500,000. 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 $540,000. 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 $495,000.


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 :-

A. Rival Industries :-

  1. This change identified is the revision of usefull life of the asset with changes in useful life the depriciation amount per annum will aslo br change so, This is a change in Estimate.
  2. No Journal Entry require to change is tne Estimate.
Calculation of Annual Dericiation after Estimate change
Cost of the Building 10,500,000
Use full life Original 40
Annual Depriciaption 2,62,500
UnDepriciated Cost 10237500
Revised Usefull life 28 Years
Estimate Remaining Life 28 - 3 Years 25 Years
New Anual Depriciation 10237500 / 25 409500
  • 2021 Adjusted Entry :-
Depriciation Expense DR. 409500
To Accumulated Depriciation CR. 409500

B. Hoffman Group :-

on Begingin of Jan ,2017

Cost of Equipment = $ 5,40,000
usefull life = 10 years

STRAIGHT LINE METHOD

Annual Depriciation = $ 5,40,00 / 10 = $ 54,000
Accumalated SLM Depriciation afte 4 years = $ 54,000 * 4 = $2,16,000
SLM Book Value after 4 year 2021 = $ 5,40,000 - $ 2,16,000 = $ 3,24,000

Double Declining Balance

SLM Rate each year = 10%

so that DDB rate = 20%

YEAR Begininng Book Value DDB RATE DDB DEPRICIATION Accumulated Depriciation Ending Book Value
2017 540000 20% 108000 108000 432000
2018 432000 20% 86400 194400 345600
2019 345600 20% 69120 263520 276480
2020 276480 20% 55296 318816 221184

The DDB method at the end of 2020 on Jan 1 2021 is = $3,18,816 - 2,16,000 = $1,02,816

if the company had used DDB Method throught depriciation in prior years would have been 102816 heigher
means some net income reported in prior years would have 102816 lower, retaining earning to $ 1,02,816 lower
so that Retaining account must be reduce and the accumalated depriciation accout mus be incured.

  • Change in Accounting prinicple that is accounted for change in estimate

Journal Entry requie as per above Changes :

Retained Earning A/C. DR. $1,02,816
Accumlated Depriciation CR. $1,02,816
  • Adjusted Entry For 2021 :-
Depriciation Expense DR. $44,236
To Accumulated Depriciation CR. $44,236

DDB Depriciation For 2020 : - 2,211,84 * 20% = 44,236

C. Jantzen Specialties :-

  1. The Change in Accounting Prinicple Aacounted for as a change in Estimate
  2. No Journal Entry Require due to change will be effect only for asset placed in service after the date of change.
    Depriciation dont require to revised due to change does not affect asset depriciation in prior period
    In this case change in depriciation method for the newly aquired vehicles. A disclouser note still is require to provide justification for the change and to Report the Effect of the change on current year's Income.

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