Lugar Company purchased a piece of machinery for $30,000 on January 1, 2016, and has been depreciating the machine using the sum-of-the-years'-digits method based on a five-year estimated useful life and no salvage value. On January 1, 2018, Lugar decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life is changed to a total of six years from the date of purchase. Ignore income taxes. Required: 1. Prepare the appropriate journal entry, if any, to record the accounting change under GAAP. 2. Prepare the journal entry to record depreciation for 2018.

1. No journal entries are required

2. Debit : Depreciation expense : $3667

Credit : Accumulated depreciation : $3667

Explanation:

1. GAAP stands for Generally Accepted Accounting Principles, which is a set of accounting standards, procedures and principles that public companies in the U.S must follow when they compile their financial statements.

What has happened in the scenario given is an accounting change of a change in accounting estimate. This arises when new information surfaces regarding certain estimates. This is a prospective change whereby a material change in estimates is documented in the financial statements and the change is made going forward. It does not correct or revise the past, and no journal entries are required to change prior financial statements.

2. Sum-of-year's digits is a form of accelerated depreciation which believes that the productivity of an asset reduces overtime, hence so does its depreciation cost. This is calculated as follows:

(Remaining useful life of the asset / sum of the year's digits) x depreciation cost

OR

(Remaining useful life of the asset / sum of the year's digits) x (Cost of asset - salvage value)

In this case however, we are unaware of total depreciation cost. We can use the information provided to obtain this...

We can obtain the sum of years depreciation as follows:

Total number of useful life years = 5

Hence, sum of the year's digits is = 1 + 2 + 3 + 4 + 5 = 15

From January 2016 to January 2018, the machinery has depreciated for 2 years. Since the asset has no salvage value, the cost of asset is the same as the total depreciation cost.

Thus, depreciation for 2016 = 5/15 x 30,000 = $10,000

Depreciation cost for 2017 = 4/15 x (30,000 -20,000*) = $5333

*Previous year depreciation has to be reduced

Total depreciation as of January 2018: $10,000 + $5333 = $15333

Asset value as of January 2018 = 30,000 - $15333 = $14667

Here on wards, it is calculated using straight-line depreciation. This is where the same amount is reduced every year for the period of the asset's life.  It is calculated as :

(Cost of asset - residual value) / number of useful life

The asset now has useful life of 6 years. However, 2 has already finished, thus 4 years remaining.

Straight-line depreciation per year = ($14667 - 0) / 4 = $3667

Journal entries:

Debit : Depreciation expense : $3667

Credit : Accumulated depreciation : $3667

(recording the depreciation of machinery)

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