Reporting Accounting Changes
The following are two independent, unrelated sets of facts concerning accounting changes.
(a) Case 1: Runyon Development Company determined that the amortization rate on its patents is unacceptably low due to current advances in technology. The company decided at the beginning of 2008 to decrease the estimated useful life on all existing patents from 10 years to 7 years. Patents were purchased on January 1, 2003, for $3,000,000. The estimated residual value is $0.
(b) Case 2: Cartwright Corporation decided on January 1, 2008, to change its depreciation method for manufacturing equipment from an accelerated method to the straight line method. The straight line method is to be used for new acquisitions as well as for previously acquired equipment. As of January 1, 2008, the total historical cost of depreciable assets is $800,000; accumulated depreciation on those assets is $343,000. The expected remaining useful life of Cartwright’s depreciable assets as of January 1, 2008, is 10 years; the expected salvage value is $25,000.
Instructions: For each of the cases:
1. Identify the type of accounting change.
2. Explain how the accounting change should be reported in 2008.
3. Explain the effect of the change on the December 31, 2008, balance sheet and the 2008 income statement.