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ACC-302-Ch-20-Solutions-practice

ACC-302-Ch-20-Solutions-practice - EXERCISES 2023 Year...

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EXERCISES 20–23. Year Double-Declining-Balance 2001 $50,000 × 0.20 = $10,000 2002 40,000 × 0.20 = 8,000 2003 32,000 × 0.20 = 6,400 2004 25,600 × 0.20 = 5,120 $29,520 Book value, January 1, 2005: $50,000 – $29,520 = $20,480 1. 2005 Depreciation Expense [($20,480 – $500)/5] ............. 3,996 Accumulated Depreciation—Machinery ................ 3,996 2. Because the accounting change involves both a change in principle and a change in estimate, it should be treated as a change in estimate, which results in a new depreciation amount for 2005 ($3,996) and for each of the next 4 years. 20–24. 1. APB Opinion No. 20 requires that changes in accounting estimates (e.g., useful life of an asset) should be reflected in the period of change and in future periods. Also, there should be no restatement of amounts recorded in prior statements. Thus, the cumulative effect on previous periods resulting from a change in the estimated useful life of the asset is zero, and no journal entry is necessary. 2. Depreciation expense for 2005: 2002 ($1,500,000/6) ............................................. $250,000 2003 ..................................................................... 250,000 2004 ..................................................................... 250,000 Depreciation to date .......................................... $750,000 2005 = [($1,500,000 – $750,000)]/4 = $187,500 annual straight-line depreciation. 20–25. 1. 2005 Dec. 31 Bad Debts Expense ........................................ 9,750 Allowance for Bad Debts ........................... 9,750 $650,000 × 0.015 = $9,750 2. Because the change is a change in estimate, no cumulative adjustment is made. The change is handled prospectively, in the current and future periods. However, the balance in the allowance for bad debts account should be analyzed to determine whether net accounts receivable are reported at their net realizable value. In this exercise, the balance in the allowance account may be too high because of the overestimate of bad debt expense in past
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years, suggesting the need for a special reduction in bad debt expense this year to adjust the balance to the correct amount.
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20–25. (Concluded) 3. The prior years’ financial statements were correctly stated given the information available at the time. Any time one is dealing with estimates, there will always be a difference between the estimate and the actual occurrence. If financial statements were restated every time an estimate was found to have been incorrect, financial statements would be restated every year. Because long- term assets lasted longer or shorter than expected or their salvage values were realized upon disposal, the financial statements would be revised. This would then reduce investor confidence in the financial statements because they would be revised and changed year after year. 20–26. 1. Depreciation expense for 2003 and 2004 is calculated as follows: $600, $60, 000 000 20 - years = $27,000 per year 2. To calculate depreciation expense for 2005, a new book value must be computed as of the date of the change in estimate: Original purchase price ..................................... $600,000 Less: Depreciation for 2 years ($27,000 × 2). . 54,000 New book value .................................................. $ 546,000 The subsequent depreciation then uses this new book value and incorporates the revised salvage value. years 10 $80,000 $546,000 - = $46,600 3. Because this exercise deals with a change in estimate, there is no entry to account for the change in estimate at the beginning of 2005.
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