Question 2

On December 31, 2010, before the books were closed, the management and accountants of Baker Inc made the following determinations about three depreciable assets:

1. Depreciable asset A was purchased January 1, 2006. It originally cost $630,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2010 the decision was made to change the depreciation method from straight-line to sum-of-the-years'-digits, and the estimates relating to useful life and salvage value remained unchanged.
2. Depreciable asset B was purchased January 1, 2006. It originally cost $120,000 and was depreciated on the straight-line method basis. The asset was originally expected to be useful for 12 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $3,000.
3. Depreciable asset C was purchased January 1, 2006. The asset's original cost was $170,000, and this amount was entirely expensed in 2006. This particular asset has a 10-year useful life and no salvage value. The straight-line method was used for depreciation.

Additional data:

• Income in 2010 before depreciation expense amounted to $380,000
• Depreciation expense on assets other than A, B, and C totaled $60,000 in 2010.
• Income in 2009 was reported at $360,000
• Ignore all income tax effects.
• 200,000 shares of common stock were outstanding in 2009 and 2010.

Required:

a. Prepare the necessary journal entries in 2010 to record these determinations.

b. Prepare comparative retained earnings statements for Baker Inc for 2009 and 2010. The company had retained earnings of $190,000 at December 31, 2008.