On December 31, 2010, before the books were closed, the management and accountants of Baker Inc made the following determinations about 2 of its depreciable assets:
1. Depreciable asset A was purchased January 1, 2006. It originally cost $630,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 20 years and have a zero salvage value. In 2010 the decision was made to change the depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to useful life and salvage value remained unchanged.
2. Depreciable asset B was purchased January 1, 2006. It originally cost $120,000 and was depreciated on the straight-line method basis. The asset was originally expected to be useful for 15 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of this asset to 8 years and to estimate the salvage value at $8,000.
Additional data:
• Income in 2010 before depreciation expense amounted to $390,000
• Depreciation expense on assets other than A and B totaled $50,000 in 2010.
• Income in 2009 was reported at $350,000
• Ignore all income tax effects.
• 200,000 shares of common stock were outstanding in 2009 and 2010.
Required:
a) Prepare all necessary journal entries in 2010 for the above determinations.
b) Prepare comparative retained earnings statements for Baker Inc for 2009 and 2010. The company had retained earnings of $100,000 at December 31, 2008.
c) Distinguish between a change in an Accounting Estimate and a change in an Accounting Principle.