Changes in Accounting Estimates and Accounting Principles
Due to changing economic conditions and to making its financial statements more comparable to those of other companies in its industry, the management of Kelsea Inc. decided on January 1, 2008, to review its accounting practices. Kelsea decided to change its allowance for bad debts from 2% to 3.5% of its outstanding receivables balance. Kelsea decided to begin using the straight line method of depreciation on its building instead of the sum of the years’ digits method. The change will be effective as of January 1, 2008. Based on further information, it also was decided that the building has 10 more years of useful life as of January 2, 2008.Kelsea bought the building on January 1, 1998, at a cost of $550,000. At that time, Kelsea estimated it would have a 15 year useful life. The building has no expected salvage value. Prior years’ depreciation is as follows:
|
1998 |
$68,750 |
2003 |
$45,833 |
|
1999 |
64,167 |
2004 |
41,250 |
|
2000 |
59,583 |
2005 |
36,667 |
|
2001 |
55,000 |
2006 |
32,083 |
|
2002 |
50,417 |
2007 |
27,500 |
Kelsea determined that starting with the current year, it would depreciate the company’s printing press using hours of use as the depreciation base. The press, which had been purchased on January 1, 1995, at a cost of $930,000, was being depreciated for 25 years using the straight line method. No salvage value was anticipated. It is estimated that this type of press provides 200,000 total hours of use and, as of January 1, 2008, it had been used 76,000 hours. At the end of 2008, the plant manager determined that the press had been run 6,250 hours during the year. Ignore income taxes relating to this change.
1. Evaluate each of the foregoing changes and determine whether it is a change in estimate or a change in accounting principle.
2. Give the journal entries required at December 31, 2008, to account for bad debt expense and depreciation expense given the preceding changes. Kelsea’s receivable balance at December 31, 2008, was $345,000. Allowance for Bad Debts carried a $1,000 debit balance before adjustment.