Question 4: Hearts, Inc. acquired the following assets in January 2012:
• Equipment, estimated service life, 5 years; no salvage value $650,000 • Building, estimated service life, 40 years; salvage value, $500,000 $5,500,000
The equipment was depreciated using the double-declining balance method in 2012 and 2013 for financial reporting purposes. In 2014, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 40 years to 35 years, with no change in the estimated salvage value. The building has been and remains depreciated on the straight-line method.
a) Prepare the general journal entry to record depreciation expense for the equipment in 2014. Show all computations.
b) Prepare the journal entry to record depreciation expense for the building in 2014. Sho all computations.
Question 5: Royal Inc. began operations on January 1, 2009, and uses the FIFO method of pricing inventory. Management is contemplating a change in inventory methods for 2015. The following information is available for the years 2012–2014:
Net Income Computed Using: Average-Cost Method FIFO Method 2012 $105,000 $120,000 2013 70,000 80,000 2014 150,000 165,000
a) Prepare the journal entry necessary to record a change from the FIFO method to the average cost method in 2015. b) Determine net income to be reported for 2012, 2013, and 2014, after giving effect to the change in accounting principle. c) Changes in accounting principle are handled retrospectively. Briefly explain why they are treated this way instead of prospectively. In your answer, describe what “retrospectively” and “prospectively” mean.