Ingles
Corp. changed from the straight-line method of depreciation on its plant assets
acquired early in 2009 to the double-declining-balance method in 2011 because
of a change in the pattern of benefits received (before finalizing its 2011
financial statements). The assets had an eight-year life and no expected residual
value. Information related to both methods follows:
Year Double
Declining Balance Straight Line Difference
Depreciation Depreciation
2009 250,000 125,000 1250,000
2010 187,500 125,000 62,500
2011 140,625 125,000 15,625
Net
income for 2010 was reported at $270,000; net income for 2011 before
depreciation and income tax is $300,000.
Assume
an income tax rate of 30%.
Instructions
The
change from the straight-line method to the double-declining-balance method is
considered a change in estimate.
(a)
What net income is reported for 2011?
(b)
What is the amount of the adjustment to opening retained earnings as at January
1, 2011?
(c)
What is the amount of the adjustment to opening retained earnings as at January
1, 2010?
(d)
Prepare the journal entry(ies), if any, to record the adjustment in the
accounting records, assuming that the accounting records for 2011 are not yet
closed.
(a) The change
in estimate would be applied in 2011. The amount of depreciation expense for
2011 would be calculated as a change in estimate.
Income before
depreciation and income taxes $300,000
Depreciation
expense* 250,000
Income before
income taxes 50,000
Income taxes
(30%) 15,000
Net income $35,000
* Cost of assets = $125,000 X 8 years =
$1,000,000
Carrying
amount = $1,000,000 – ($125,000 X 2) = $750,000
Depreciation
expense = $750,000 X 2/6** = $250,000
** The remaining useful life is 8 years
less the 2 years already depreciated.
(b), (c), (d)
There
would be no adjustment to opening retained earnings for any previous year since
changes in estimate are accounted for prospectively. There would also be no
journal entry to adjust the accounting records. The depreciation for 2011 of
$250,000 would be recorded.
