stumped on this one
Tag Question
On January 2, 2005, to better reflect the variable use of its only machine, Holly, Inc. elects 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, 2003, is $50,000, and its estimated life is ten years. Holly estimates that the machine's total life is 50,000 machine hours.
Machine-hour usage was 8,500 during 2004 and 3,500 during 2003. Machine-hour usage for 2005 is 3,800.
Holly's income tax rate is 30%. Holly should report the accounting change in its 2005 financial statements as a(an)
A. Estimate change recognizing $3,800 of depreciation in 2005.
B. Estimate change recognizing $4,000 of depreciation in 2005.
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.
Correct!
A change in depreciation method is accounted for as an estimate change. The remaining book value at the beginning of the year of change is allocated over the remaining useful life using the new method.
Book value January 1, 2005 = $50,000 – ($50,000/10)2 = $40,000.
Estimated remaining machine hours at January 1, 2005 = $50,000 – $8,500 – $3,500 = $38,000.
Depreciation expense for 2005 = $3,800($40,000/$38,000) = $4,000.
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