Case Scenario:
Artsfoh Corporation purchased manufacturing equipment in 2004 for $4,000,000. The equipment was expected to have a useful life of 20 years with a salvage value of $500,000. Artsfoh used double-declining balance depreciation from 2004 through 2007. A full year's depreciation was taken in the first year. In early 2008, however, Artsfoh received information that the machine would be obsolete and would need to be replaced within 8 years. Artsfoh revised the estimate of the equipment's useful life from 20 years to 12 years (8 years remaining), and the estimated salvage value was changed to zero. Artsfoh also decided to change to straight-line depreciation for the asset's remaining useful life. Artsfoh believes that straight-line will better approximate the actual value derived from the remaining usage of the machine. Depreciation expense has not been recorded on the manufacturing equipment for 2008.
Question 1: Where can you find the most current authoritative guidance for accounting changes and error corrections in U.S. GAAP? In IFRS?
Question 2: According to these standards, is a change in depreciation method considered a change in principle or a change in estimate? (Provide an appropriate citation).
Question 3: Should the change affect prior period, current period, and/or future period income?
Question 4. Record the journal entry to recognize depreciation expense for 2008 and to reflect the change in depreciation method and estimate.
Question 5: How much depreciation expense should Artsfoh report on the 2008 income statement and on the 2007 comparative income statement?
Question 6: What book value should Artsfoh report for the manufacturing equipment on the December 31, 2008 balance sheet and the December 31, 2007 comparative balance sheet?