Tom Zuluaga Company placed an asset in service on January 2, 2018. Its cost was $1,350,000 with an estimated service life of 6 years. Salvage value was estimated to be $90,000. Using the double-declining-balance method of depreciation, the depreciation for 2018, 2019, and 2020 would be $450,000, $300,000, and $200,000 respectively. During 2020, the company’s management decided to change to the straight-line method of depreciation. Assume a 35% tax rate. How much depreciation expense will be reported in the income from continuing operations of the company’s income statement for 2020? (Hint: Use the new depreciation in the current year.) What amount will be reported as an adjustment to the beginning balance of retained earnings to reflect the effect of the change in accounting principle?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Tom Zuluaga Company placed an asset in service on January 2, 2018. Its cost was $1,350,000 with an estimated service life of 6 years. Salvage value was estimated to be $90,000. Using the double-declining-balance method of
- How much depreciation expense will be reported in the income from continuing operations of the company’s income statement for 2020? (Hint: Use the new depreciation in the current year.)
- What amount will be reported as an adjustment to the beginning balance of
retained earnings to reflect the effect of the change in accounting principle?
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