For financial reporting, Clinton Poultry Farms has used the declining-balance me
ID: 2416281 • Letter: F
Question
For financial reporting, Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment acquired at the beginning of 2010 for $2,560,000. Its useful life was estimated to be six years with a $160,000 residual value. At the beginning of 2013, Clinton decides to change to the straight-line method. The effect of this change on depreciation for each year is as follows ($ in 000s):
Required:
1. Briefly describe the way Clinton should report this accounting change in the 2012–2013 comparative financial statements.
2. Prepare any 2013 journal entry related to the change.
Explanation / Answer
Answer 1. A change in Deprecition method is considered as a change in Accounting estimate resulting from a change in accounting principle. In other woeds, a change in depreciation method reflect a change in the
Accordingly, Clinton should report the change propectively, previous financial statements should not be revised. The company should enjoy the benefit of straight line method from now onwards. The undepreciated cost remaining at the time of change should be depreciated through straight line method over the remaining useful life. A discloure note should justify that the change is preferable and discribe the effect of the change on the financial statement line item and per share amounts affected for all periods reported.
Answer 2. Journal Entry for the change is
Depreciation Expenses Dr. 200000
Accumulateed Depreciation 200000
Calculated as (in $) :
Assets cost 2560000
Less : Acculumated Depreciation(till 2012) (1801000)
Undpreciated Cost 759000
Less : Estimated Residual Value (160000)
To be depreciated over remaining 3 years 599000
Therefore Annual Straight line depreciation 200000.
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