Prior to 2018, Trapper John Inc. used sum-of-the-years'-digits depreciation on its store equipment. Beginning in 2018, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2016, had an estimated useful life of five years and no estimated residual value. To account for the change in 2018, Trapper John:
A) Would retrospectively report $600,000 in depreciation expense annually for 2016 and 2017, and report $600,000 in depreciation expense for 2018.
B) Would adjust accumulated depreciation and retained earnings for the excess charges made in 2016 and 2017.
C) Would report depreciation expense of $400,000 in its 2018 income statement.
D) None of these answer choices is correct.

Question

Quizplus · Accepted Answer

A change in depreciation methods is considered to be a change in accounting estimate that is achieved by a change in accounting principle and handled prospectively.
The computation is as follows:
Book value at 1/1/2018 = $3,000,000 [(5/15 × $3,000,000) + (4/15 × $3,000,000) = $1,200,000.
New depreciation = $1,200,000 ÷ 3 = $400,000 per year for 2018-2020.