Described below are three independent and unrelated situations involving account
ID: 2586801 • 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. On December 30, 2014, Rival Industries acquired its office building at a cost of $11,300,000. 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. At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $715,000. 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. 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 $575,000. 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 2018 related to the situation described. (Ignore income tax effects.)
Explanation / Answer
a. Rival Industries:
1. This is an accounting change: Change in accounting estimate. This is to be handled prospectively in accounts.
2. Accumulated Depreciation as of December 31, 2017 : $ 11,300,000 / 40 x 3 = $ 847,500.
Book Value of the building as on January 1 : 2018 : $ 11,300,000 - $ 847,500 = $ 10,452,500.
Revised annual depreciation = $ 10,452,500 / 25 = $ 418,100
b. Hoffman Group :
1. It is an accounting change : Change in accounting estimate. As such, no retrospective restatement is necessary. To be handled prospectively.
Accumulated depreciation as of December 31, 2017 = $ 715,000 / 55 x 34 = $ 442,000.
Book value of the asset on January 1, 2018 = $ 715,000 - $ 442,000 = $ 273,000.
Annual depreciation under straight-line method over the remaining useful life = $ 273,000 / 6 = $ 45,500.
c. Jantzen Specialties:
1. Accounting change : Change in accounting estimate. No retrospective restatement necessary. To be prospectively handled.
2. No journal entry required for the increase in current year net income as a result of the change.
Date Account Titles Debit Credit $ $ December 31, 2018 Depreciation Expense 418,100 Accumulated Depreciation : Buildings 418,100