On January 2, 2010, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 2008, was 50,000, and its estimated life was ten years. Holly estimates that the machine’s total life is 50,000 machine hours. Machine hours usage was 8,500 during 2008 and 3,500 during 2009.Holly’s income tax rate is 30%. Holly should report the accounting change in its 2010 financial statements as a(n) a. Cumulative effect of a change in accounting principle of 2,000 in its income statement. b. Adjustment to beginning retained earnings of 2,000. c. Cumulative effect of a change in accounting principle of 1,400 in its income statement. d. Adjustment to beginning retained earnings of 1,400.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 2, 2010, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of
a. Cumulative effect of a change in accounting principle of 2,000 in its income statement.
b. Adjustment to beginning
c. Cumulative effect of a change in accounting principle of 1,400 in its income statement.
d. Adjustment to beginning retained earnings of 1,400.
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