On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the…

According to U.S. Generally Accepted Accounting Principles (GAAP), a change in the method of depreciation is considered a change in an accounting estimate that is effected by a change in accounting principle. Per ASC 250, such changes are accounted for prospectively. This means the change is applied to the current period (20X6) and future periods. No cumulative effect adjustment is recorded on the income statement or to the beginning balance of retained earnings. Instead, the remaining undepreciated book value of the asset at the date of the change is depreciated over its remaining useful life using the new method. Therefore, the cumulative effect reported in the 20X6 income statement is zero.

A. $98,000 debit: This is an incorrect calculation of the net-of-tax effect. More importantly, this type of change is accounted for prospectively, not with a cumulative effect adjustment.
B. $98,000 credit: This represents the net-of-tax cumulative effect ($140,000 difference (1 - 0.30 tax rate)) that would have been reported under outdated standards. Current GAAP requires prospective treatment.
C. $140,000 credit: This is the pre-tax difference in accumulated depreciation ($560,000 - $420,000). Cumulative effects are reported net of tax, and this change requires prospective application. ---

1. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections.

ASC 250-10-45-21: "A change in the method of depreciation, amortization, or depletion for long-lived, nonfinancial assets shall be accounted for as a change in accounting estimate that is effected by a change in accounting principle. Such a change shall be accounted for prospectively."

ASC 250-10-50-4: This section outlines the disclosure requirements for a change in accounting estimate, which includes the effect on current period income, but does not mention a cumulative effect adjustment for this type of change.

2. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate Accounting (18th ed.). Wiley.

Chapter 22, "Accounting Changes and Error Analysis," explicitly states that changes in depreciation methods are an exception to the retrospective application rule for changes in principle. The chapter clarifies these are handled prospectively, meaning no cumulative effect is recorded. The undepreciated book value is simply depreciated over the remaining life.

3. Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2021). Intermediate Accounting (11th ed.). McGraw-Hill Education.

Chapter 4, "The Income Statement and Statement of Comprehensive Income," discusses accounting changes. It specifies that a change in depreciation method is treated as a change in estimate and applied prospectively, confirming that no cumulative effect is reported on the income statement.