Described below are three independent and unrelated situations involving account
ID: 2553804 • Letter: D
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 $10,300,000. It has been depreciated on a straight- b. At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $468,000. lts useful life was estimated to be 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. 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 $475,000 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. (lgnore income tax effects.) Complete this question by entering your answers in the tabs belowExplanation / Answer
1.
Type of change= change in accounting estimate.
Accumulated depreciation for the asset assuming useful life of 40yrs
= $10,300,000/40
=$ 257,500/yr
Depreciation assuming useful life of 28yrs
= $ 10,300,000/28
=$367,857/yr
Since depreciation was charged for 3yrs assuming life of 40 yrs, total depreciation charged=257,500*3=$772,500
Revised depreciation assuming useful life 28yrs
=367857*3=$1,103,571
Excess depreciation required= $1,103,571-772,500=$331,071
Hence the journal entry for direct change in this situation
Adjusting journal entry
2.
Type of change = change in accounting estimate
Hoffman group purchased equipment for $468,000 and charged depreciation from beginning of 2014 to end of 2017 in sum of digit method
Total depreciation charged in sum of digit method
Total depreciation charged = 338,000
Depreciation in straight line method= 468,000/8=58,500/yr
Hence depreciation overcharged
=338,000-(58,500*4)=104,000
Journal entry for change in the situation
Adjusting journal entry
3.
The change increased the current year income by$475,000
Type of change = change in accounting estimate.
Date General journal Debit Credit Dec 2018 Depreciation expense 367,857 Accumulated depreciation 367,857