Accounting Change and Error Analysis Problem
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On December 31, 2008, before the books were closed, the management and accountants of Keltner Inc. made the following determinations about three depreciable assets.
1. Depreciable asset A was purchased January 2, 2005. It originally cost $495,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2008, the decision was made to change the depreciation method from straight-line to sum-of-the-years'-digits, and the estimates relating to useful life and salvage value remained unchanged.
2. Depreciable asset B was purchased January 3, 2004. It originally cost $120,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero salvage value. In 2008, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $3,000.
3. Depreciable asset C was purchased January 5, 2004. The asset's original cost was $140,000, and this amount was entirely expensed in 2004. This particular asset has a 10-year useful life and no salvage value. The straight-line method was chosen for depreciation purposes.
Additional data:
1. Income in 2008 before depreciation expense amounted to $400,000.
2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2008.
3. Income in 2007 was reported at $370,000.
4. Ignore all income tax effects.
5. 100,000 shares of common stock were outstanding in 2007 and 2008.
What are the necessary entries in 2008 to record these determinations.
How do I prepare comparative retained earnings statements for 2007 and 2008.
The company had retained earnings of $200,000 at December 31, 2006.
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Solution Summary
The solution explains how to account for accounting changes and errors.
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Please see the attached file.
(a) We calculate the depreciation expense for the three assets
1. Asset A - The depreciation method is changed from straight line to sum of year digits. A change in depreciation method is treated as a change in estimate and is accounted for prospectively. We calculate the book value at the start of 2008 and then calculate the depreciation using the sum of year digits.
Using straight line, the depreciation per year is 495,000/10=49,500. Total depreciation for 3 years is 49,500X3=148,500. The book value is
Cost of Asset A $495,000
Less: Depreciation prior to 2008 148,500
Book value, January 1, 2008 $346,500
We use sum of year digits, the remaining life is 7 years, so the ...
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