Johnston Doors began operations on January 1, 2010. On that day, Johnston purchased the following assets, both of which were depreciated using the straight-line method.
Equipment: Cost, $48,000; estimated salvage value, $5,000; estimated useful life, 10 years.
Building: Cost, $85,000; estimated salvage value, $15,000; estimated useful life, 15 years.
As of January 1, 2014, Johnston reviewed its accounting records and determined that the building should have a total useful life of 20 years. In addition, because of significant wear on the equipment, Johnston has decided to use the sum-of-the-years'- digits method for depreciating equipment.
Johnston also has found that its estimated bad debt expense has been consistently higher than actual bad debts. Management proposes lowering the percentage from 3% of credit sales to 2%. If 2% had been used since 2010, the balance in Allowance for Bad Debts at the beginning of 2014 would have been $3,200 rather than $6,900. Credit sales for 2014 totaled $250,000, and accounts written off as uncollectible during 2014 totaled $5,500.
Instructions:
(Ignore income tax effects.)
1. What is the proper accounting treatment for each of the proposed changes?
2. Prepare the journal entries necessary to record the depreciation expense for 2014 for both the equipment and the building.
3. Prepare the journal entry to record the write-off of accounts deemed uncollectible during 2014 and the adjusting entry at year-end to record the bad debt expense for the period.
4. What adjustment is made to the allowance account at the beginning of 2014 as a result of changing the bad debt estimate percentage?