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.
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.
(a) Prepare all necessary entries in 2008 to record these determinations.
(b) Prepare comparative retained earnings statements for Eloise Keltner Inc. for 2007 and 2008. The company had retained earnings of $200,000 at December 31, 2006.
The solution examines accounting change and error analysis for Keltner Inc.