Gundrum Company purchased equipment on January 1, 2015 for $850,000. The equipment was expected to have a useful life of 10 years and a salvage value of $30,000. Gundrum uses the straight-line method of depreciation. At the beginning of 2020, Gundrum determined the total estimated life of the equipment was 13 years and the residual value would be $10,000 at the end of that time.

Required:

Prepare any entry needed in 2020 to account for this change.

Prepare journal entry to record the change in service life of the equipment.

Accounting changes: When a company requires to sacrifice the consistent accounting methods and procedures, to enhance the usefulness and relevance of the accounting information, those changes are referred to as accounting changes. Such inevitable accounting changes decrease the comparability and consistency of accounting information. The reasons for accounting changes could be new methods introduced by FASB (Financial Accounting Standards Board), changes in accounting principles, and changes in accounting estimates.

Accounting treatment of change in depreciation method: In the case of a change in depreciation method, the change in estimate depends on the estimated benefits out of the depreciation method applied, hence, cannot be concluded as to whether it is a change in accounting principle, or a change in accounting estimate. As per Generally Accepted Accounting Principles (GAAP) this change should be accounted for as a change in accounting estimate, and not as a change in accounting principle. A change in accounting estimate like the change in depreciation method, or change in service life of an asset, effects the values of the year in which the change is made, and future period only, but not the previous periods. Hence, the change in depreciation method is accounted for prospectively.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entry to record the change in service life of the equipment.