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On January 2, Year 3, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, Year 1, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during Year 2 and 3,500 during Year 1.
Holly's income tax rate is 30%. Holly should report the accounting change in its Year 3 financial statements as a(n):
a. The correct treatment is not provided in any of the answer choices.
b. Adjustment to beginning retained earnings of $2,000.
c. Cumulative effect of a change in accounting principle of $1,400 in its income statement.
d. Cumulative effect of a change in accounting principle of $2,000 in its income statement.
答案:A
Explanation
Choice "a" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.
Choices "d", "b", and "c" are incorrect, per the above explanation.
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