On December 31, 2011, before the books were closed, management and the accountant at Madrasa Inc. made the following determinations about three depreciable assets.
1. Depreciable asset A was purchased on January 2, 2008. It originally cost $540,000 and the straight-line method was chosen for depreciation. The asset was originally expected to be useful for 10 years and have no residual value. In 2011, the decision was made to change the depreciation method from straight-line to double-declining-balance, and the estimates relating to useful life and residual value remained unchanged.
2. Depreciable asset B was purchased on January 3, 2007. It originally cost $180,000 and the straight-line method was chosen for depreciation. The asset was expected to be useful for 15 years and have no residual value. In 2011, the decision was made to shorten this asset’s total life to nine years and to estimate the residual value at $3,000.
3. Depreciable asset C was purchased on January 5, 2007. The asset’s original cost was $160,000 and this amount was entirely expensed in 2007 in error. This particular asset has a 10-year useful life and no residual value. The straight-line method is appropriate.
Additional data:
1. Income in 2011 before depreciation expense amounted to $400,000.
2. Depreciation expense on assets other than A, B, and C totalled $55,000 in 2011.
3. Income in 2010 was reported at $370,000.
4. In both 2010 and 2011, 100,000 common shares were outstanding. No dividends were declared in either year. Madrasa follows IFRS.
Instructions
Answer the following questions, ignoring all income tax effects.
(a) Prepare all necessary entries in 2011 to record these determinations.
(b) Calculate the adjusted net income and earnings per share for 2010 and 2011.
(c) Prepare comparative retained earnings statements for Madrasa Inc. for 2010 and 2011. The company reported retained earnings of $200,000 at December 31, 2009.
(d) Prepare the required note disclosures for each of these changes.
(e) How would the changes to Madrasa’s depreciable assets be reflected on the statement of cash flows?