Question

On October 1, 2014, Independent Manufacturing Inc. (Independent) purchased a state-of-the-art mould-casting machine for $4,100,000. In dependent's management estimated that the machine would be useful for five years and had a residual value of $250,000. Independent uses straight-line depreciation on all its capital assets. In September 2017, management realized that the useful life of the ma chine was going to be seven years. The estimated residual value is $175,000. Independent's year-end is September 30.

Required:
a. What depreciation expense would Independent have originally reported in fiscal 2015 and 2016 for the machine? What would the carrying amount of the machine have been on September 30, 2016?. What depreciation expense would Independent have reported in fiscal 2015 and 2016 for the machine after the accounting change had been made?
c. What depreciation expense will Independent report for the machine for the year beginning ended September 30, 2017, assuming the residual value remains $175,000? What would the carrying amount of the machine be on September 30, 2017?
d. What is the economic significance of this change? How are accounting ratios affected by the change? What are the implications of this change to users of the financial statements? Explain.
e. Do you think this type of change can be objectively made? Explain. What possible motivations could Independent's managers have for making the change? Explain.



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  • CreatedFebruary 26, 2015
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