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Exam Code: HP5-C10D

Exam Name: Selling HP Print Security 2020 delta

Version: V15.35

Q & A: 208 Questions and Answers

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NEW QUESTION: 1
On January 2, 20X5, 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, 20X3, 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 20X4 and 3,500
during 20X3.
Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements
as a(n):
A. None of the above.
B. Cumulative effect of a change in accounting principle of $1,400 in its income statement.
C. Cumulative effect of a change in accounting principle of $2,000 in its income statement.
D. Adjustment to beginning retained earnings of $2,000.
Answer: A
Explanation:
Choice "d" 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. The
cumulative effect treatment on the income statement was the treatment of most changes in accounting
principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now
given to changes in accounting principle by SFAS No. 154. However a change in depreciation method is
no longer accounted for as a change in accounting principle. Choices "a", "b", and "c" are incorrect, per
the above Explanation: .

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