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Handy Co: Change in estimate, change in entity, correction of errors

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Handy Company purchased equipment that cost $750,000 on January 1, 2006. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Handy uses the straight-line method to account for depreciation expense.

The error was discovered on December 10, 2008. Handy is subject to a 40 % tax rate.

Handy's net income for the year ended December 31, 2006, was understated by


2.Change in estimate, change in entity, correction of errors.

Discuss the accounting procedures for and illustrate the following with examples:

(a) Change in estimate

(b) Change in entity

(c) Correction of an error

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Solution Summary

The solution explains the correct alternative in relation to correction of error

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1. $402,000
The depreciation expense per year is (750,000-30,000)/9 = 80,000. This should have been recorded as an expense. The actual expense recorded was $750,000. Expense is overstated by 750,000-80,000=670,000. The net income was understated by the after tax amount = 670,000 X (1-0.4) = $402,000

2. (a) Change in estimate - A change in estimate is handled in the current and future ...

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