Question

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 $9,600,000. It has been depreciated on a straight-line basis assuming a useful life of 30 years and no residual value. Early in 2018, the estimate of useful life was revised to 18 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 $576,000. Its useful life was estimated to be 8 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 $565,000.

Required: For each change: 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 2018 related to the situation described. (Ignore income tax effects.)

Answer 1

Answer :-

1 :-

This is an adjustment in gauge .

• No passage is expected to record the change .

Adjusting entry for 2018 :-

Particulars	Debit	Credit
Depreciation expense	$576,000
Accumulated depreciation		$576,000

Working notes :-

Particulars	Amount
Cost	$9,600,000
Previous depreciation	= $9,600,000 / 30 years = $320,000
Depreciation to date [ 2015 - 2017 ]	= 3 years * $320,000 = $960,000
Un depreciated cost	= $9,600,000 - $960,000 = $8,640,000
Estimated remaining life	= 18 years - 3 years = 15 years
New annual depreciation	= $8,640,000 / 15 years = $576,000

An exposure note ought to portray the impact of an adjustment in gauge on pay before exceptional things, net gain, and related per-share sums for the present time frame.

2 :-

Particulars	Debit	Credit
Depreciation expense	$40,349
Accumulated depreciation		$40,349

Working notes :-

Sum of years digit = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8

= 36

Sum of years digit = 36

SYD	Amount
2014 depreciation	= $576,000 * [ 8 years / 36 ] = $576,000 * 0.22 = $126,720
2015 depreciation	= $576,000 * [ 7 years / 36 ] = $576,000 * 0.1944 = $111,974
2016 depreciation	= $576,000 * [ 6 years / 36 ] = $576,000 * 0.1666 = $95,961
2017 depreciation	= $576,000 * [ 5 years / 36 ] = $576,000 * 0.1388 = $79,949
Accumulated depreciation	= $126,720 + $111,974 + $95,961 + $79,949 = $ 414,604

Particulars	Amount
Cost	$576,000
Depreciation to date, SYD	$ 414,604
Un-depreciated cost as of 1/1/18	= $576,000 -  $ 414,604 = $161,396
Residual value	$0
Depreciable base	= $161,396 - $0 = $161,396
Remaining life	= 8 years - 4 years = 4 years
New annual depreciation	= $161,396 / 4 years = $40,349

An exposure note reports the impact of the change on overall gain and income per share alongside clear avocation for changing devaluation techniques.