In: Accounting
Described below are three independent and unrelated situations
involving accounting changes. Each change occurs during 2018 before
any adjusting entries or closing entries are prepared.
a- On December 30, 2014, Rival Industries acquired its office building at a cost of $10,700,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2018, the estimate of useful life was revised to 28 years in total with no change in residual value.
b- At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $550,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the sum-of-the-years’-digits method. On January 1, 2018, the company changed to the straight-line method.
c- At the beginning of 2018, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net income by $515,000.
Required:
2. Prepare any journal entry necessary as a
direct result of the change as well as any adjusting entry for 2018
related to the situation described. (Ignore income tax
effects.)
a. There is no journal entry for the direct result of change since this is just an estimate
Calculation of prior period depreciation:
10,700,000/40 = 267,500 per year x 3 years= 802,500
Undepreciated cost: 10,700,000 - 802,500 = 9897,500
New depreciation amount: 9897,500 / 25 = 395,900 (estimated life revised to 28 years - 3 years already passed)
Journal entry for 2018:
Depreciation expense $395,900
Accumulated depreciation $395,900
b.There is no journal entry for the direct result of change
Formula to calculate depreciation as per sum of digits :
Applicable percentage = n(n+1) / 2
where n is no of years of useful life
i.e. 10 x 11 / 2 = 55
2014 depreciation = 550000 x 10/55 = 10000
2015 depreciation = 550000 x 9/55 = 9000
2016 depreciation = 550000 x 8/55 = 8000
2017 depreciation = 550000 x 7/55 = 7000
Total for 4 years = 34000
Undepreciated value = 550000-34000 = 516000
New depreciation amount as per SLM = 516000/6=86000 <10 years useful life - 4 already done>
Journal entry for 2018:
Depreciation expense $86,000
Accumulated depreciation $86,000
c. There is no journal entry as the change only impacts the newly acquired buildings and equipment