Problem 20-6 Change in principle; change in depreciation methods [LO20-3] During

Question

Problem 20-6 Change in principle; change in depreciation methods [LO20-3]

During 2014 and 2015, Faulkner Manufacturing used the sum-of-the-years’-digits (SYD) method of depreciation for its depreciable assets, for both financial reporting and tax purposes. At the beginning of 2016, Faulkner decided to change to the straight-line method for both financial reporting and tax purposes. A tax rate of 40% is in effect for all years.

     For an asset that cost $30,000 with an estimated residual value of $1,000 and an estimated useful life of 10 years, the depreciation under different methods is as follows:

Prepare the journal entry that Faulkner will record in 2016 related to the change. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

      

Suppose instead that Faulkner previously used straight-line depreciation and changed to sum-of-the-years’- digits in 2016. Prepare the journal entry that Faulkner will record in 2016 related to the change. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

     

During 2014 and 2015, Faulkner Manufacturing used the sum-of-the-years’-digits (SYD) method of depreciation for its depreciable assets, for both financial reporting and tax purposes. At the beginning of 2016, Faulkner decided to change to the straight-line method for both financial reporting and tax purposes. A tax rate of 40% is in effect for all years.

     For an asset that cost $30,000 with an estimated residual value of $1,000 and an estimated useful life of 10 years, the depreciation under different methods is as follows:

Explanation / Answer

Solution: A change in depreciation method is considered to be a change in accounting estimate resulting from a change in accounting principle. It is similar to changing in the economic useful life of a depreciable asset and therefore the two events should be reported the same way.

(1) Here, we will depreciate the remaining undepreciated cost at the time of the change using straight line method over the remaining useful life:-

Journal Entry:

(2) Here, we will calculate depreciation by assuming that earlier Faulkner was using straight line method and now he changed to SOY method:

Journal Entry:

Particulars Amount($) Cost of asset 30,000 Less: Accumulated depreciation (SYD) to date(given in question) (10,018) Undepreciated cost (1/1/2016) 19,982 Less: Residual value (1,000) To be depreciated over remaining 8 years 18,982÷8 Annual Depreciation 2,373

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