Question

1A) On January 1, 2014, Garr Company acquired machinery at a cost of $320,000 The machinery was being depreciated using the double declining balance method. It had an estimated useful life of 8 years and no residual value. At the beginning of 2016, Garr changed to the straight-line method of depreciation. Prepare any journal entry required to account for this change.

1B) Gundrum Inc. purchased equipment on January1, 2012 for $850,000. The equipment was expected to have a useful life of 10 years and a salvage value of $30,000. Gundrum uses the straight line method of depreciation. At the beginning of 2017, Gundrum determined that the total estimated life of the equipment was 13 years and that the residual value would be $10,000. Prepare the journal entry necessary to account for this change.

Answer 1

1(A)	As per ASC 250, change in method of depreciation a 'change in principle', hence the company should account such changes restropectively.
	Date of purchase	01-Jan-14
	Cost	$320,000
	Double declining balance method
	Depreciation rate	25%
	Depreciation year 2014	$80,000
	Depreciation year 2015	$60,000
	Book value at end of 2015	$180,000
	If straight line method would have been adoped
	Depreciation rate	12.50%
	Depreciation year 2014	$40,000
	Depreciation year 2015	$40,000
	Book value at end of 2015	$240,000
	Journal entry
	Accumulated depreciation a/c dr	$60,000
	To, Retained earnings		$60,000
	(Being retrospective change accounted)
1(B)	Change in useful life or salvage value in the asset is a change in accounting estimate , hence company should account such changes prospectively.
	Cost of equipment(2012)	$850,000
	Original useful life	10 years
	Original salvage value	$30,000
	Depreciation for 2012 to 2016	$410,000	(850,000-30,000)/10*5
	Book value at beginning of 2017	$440,000
	New remaining useful life	8	(13-5)
	New salvage value	$10,000
	New depreciation per year	$50,000	(410,000-10,000)/8
	Journal entry
	(No Journal entries are required for such changes)
	Journal entries for depreciation per year would be passed at the end of each year for amount $50,000