Chapter 20, Problem 20.17E

(1)

To determine

Change in accounting estimate:

Changes in estimates are accounted with immediate effect in the financial statements. When a company revises the previous estimates, there is no revision in the preceding financial statements. Rather, the company incorporates the new accounting estimates in the financial statements of the current year.

To prepare: The necessary adjusting entry recording the revised estimate of depreciation.

Explanation of Solution

Account Explanation / Titles	Post ref.	Amount
		Debit	Credit
Depreciation expense (3)		$3,088
Accumulated depreciation			$3,088
( To adjust the revised estimate )

Table (1)

Working Notes:

Determine the amount of value of minicomputer to be depreciated.

Particulars	Amount ($)
Value of minicomputer on January 1, 2014	40,000
Old annual depreciation till December 31, 2015 (2)	(14,400)
Book value	25,600
Estimated residual value of minicomputer (revised)	(900)
Revised depreciable base of minicomputer	24,700

Table (2) (1)

Determine the amount of annual straight line depreciation till December, 31 2015.

From January 1, 2014 to December 31, 2015, the depreciation is to be calculated for 2 years and estimated residual value is $4,000.

$\begin{array}{c}\begin{array}{l}\text{Old annual}\\ \text{ depreciation}\end{array}\}=\left(\frac{\text{Cost of asset}-\text{Estimated residual value}}{\text{Estimated life of asset}}\right)\times \left(\begin{array}{l}\text{Number of }\\ \text{years completed}\end{array}\right)\\ =\left(\frac{\$40,000-\$4,000}{5\text{ years}}\right)\times 2\\ =\left(\frac{\$36,000}{5\text{ years}}\right)\times 2\\ =\$14,400\end{array}$ (2)

Determine the amount of new annual depreciation.

The revised estimated life of minicomputer is 10 years beginning from January1, 2016. Out of it 2 years of estimated life is completed. Remaining estimated life is 8 years. Cost of the minicomputer is $24,700 on January 1, 2016.

Calculate the amount of revised depreciation on minicomputer.

$\begin{array}{c}\begin{array}{l}\text{Revised depreciation on}\\ \text{ minicomputer}\end{array}\}=\frac{\text{Revised cost of the minicomputer}}{\text{Remaining estimated life of minicomputer}}\\ =\frac{\$24,700\left(1\right)}{\text{8 years}}\\ =\$3,088\end{array}$ (3)

2)

To determine

To prepare: The necessary adjusting entry recording the revised estimate of depreciation for 2016 if the company switches to sum of years’ digit method from straight line method.

Explanation of Solution

Account Explanation / Titles	Post ref.	Amount
		Debit	Credit
Depreciation expense (7)		$3,889
Accumulated depreciation			$3,889
( To adjust the revised estimate )

Table (3)

Working Notes:

Determine the amount of annual depreciation under sum of the years’ digits.

The amount of depreciation for the year 2014 is $12,000 $\left(\text{\$36,000× }\frac{\text{5years}}{\text{15years}}\right)$ and for year 2015 is $9,600 $\left(\text{\$36,000× }\frac{\text{5years}}{\text{15years}}\right)$.

$\begin{array}{c}\begin{array}{l}\text{Total depreciation }\\ \text{for 2 years}\end{array}\}=\left\{\left(\begin{array}{l}\text{Depreciation }\\ \text{for 2014}\end{array}\right)+\left(\begin{array}{l}\text{Depreciation }\\ \text{for 2015}\end{array}\right)\right\}\\ =\$12,000+\$9,600\\ =\$21,600\end{array}$ (4)

Determine the amount of value of minicomputer to be depreciated.

Particulars	Amount ($)
Value of minicomputer on January 1, 2014	40,000
Old annual depreciation till December 31, 2015 (4)	(21,600)
Book value	18,400
Estimated residual value of minicomputer (revised)	(900)
Revised depreciable base of minicomputer	17,500

  Table (4) (5)

Determine the sum of years’ digits.

It is given that number of estimated remaining life is 8 years. Now calculate the sum of years’ digits:

$\begin{array}{c}\text{Sum of the years' digit=}\frac{\text{n}\left(\text{n+1}\right)}{\text{2}}\\ \text{=}\frac{\left(8\left(9\right)\right)}{\text{2}}\\ \text{=}\left(\frac{72}{\text{2}}\right)\\ \text{=36}\end{array}$ (6)

Calculate the amount of revised depreciation on minicomputer.

$\begin{array}{c}\begin{array}{l}\text{Revised depreciation on}\\ \text{ minicomputer}\end{array}\}=\left(\begin{array}{l}\text{Revised cost of }\\ \text{the minicomputer}\left(5\right)\end{array}\right)\times \frac{\text{Remaining useful life of asset}}{\text{Sum of the years' digits }\left(6\right)}\\ =\$17500\left(5\right)\times \frac{8}{36\left(6\right)}\\ =\$3,889\end{array}$ (7)