A company placed an asset into service on January 1, 2008. Its cost was $1,350,0

Question

A company placed an asset into service on January 1, 2008. Its cost was $1,350,000 with an estimated service life of 6 years. Salvage value was estimated to be $90,000. Using the double-declining-balance method of depreciation, the depreciation for 2008, 2009, and 2010 was $450,000, $300,000, and $200,000, respectively. During 2010, however, the company's management decided to change to the straight-line method of depreciation.

Assume that the company reports only the 2010 results in its financial statements (earliest year presented) and the company is taxed at a 35% tax rate. What amount will be reported as an adjustment to the beginning balance of retained earnings to reflect the change in accounting principle?

This is my last practice problem and would like necessary work shown so I will be sure of how to calculate it for the exam. Thanks

Explanation / Answer

1,350,000 - 90,000 = 1,260,000 / 6 years = $210,000 per year For 2010 with double declining, the recorded $200,000 So the depreciation should be $10,000 more for 2010 $10,000 * (1-35%) = $6,500 So retained earnings should be debited for $6,500

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