Question

Check my work 6. Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,080,000. This cost figure included the following expenditures: 2.14 points Purchase price Freight charges Installation charges Annual maintenance charge $1,900,000 35,000 25,000 120,000 Skipped $2,880,000 Total eBook The company estimated an eight-year useful life for the equipment. No residual value is anticipated. The double-declining-balance method was used to determine depreciation expense for 2016 and 2017. Print In 2018, after the 2017 financial statements were issued, the company decided to switch to the straight-line depreciation method for this equipment. At that time, the company's controller discovered that the original cost of the equipment incorrectly included one year of annual maintenance charges for the equipment. References Required: 1. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018. 2. Ignoring income taxes, prepare any 2018 journal entry(s) related to the change in depreciation methods. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Ignoring income taxes, prepare the appropriate correcting entry for the equipment required for a transaction/event, select "No journal entry required" in the first acco View transaction list

Answer 1

If the annual maintenance charge was not included as capitalized cost of the asset, the asset value would have been less by the annual maintenance charge included and depreciation on such asset should have been charged on actual cost of the asset. As excess cost was capitalized, excess depreciation would have been claimed during first two years and so retained earnings would have been understated by depreciation amount. At the same time, as expense item was capitalized, retained earnings would have been overstated by an amount equals to annual maintenance charge. Rectification entry to be recorded should take into account rectification of short charged maintenance expense, excess asseet cost capitalized and short accumulated depreciation claimed till date, ignoring taxes thereon. Therefore, Credit General Journal Retained Earnings Accumulated Depreciation Equipment Debit $67,500 $52,500 $120,000 [= Maintenance expense incorrectly capitalized] Workings: Incorrect position: Capitalized cost Less: Depreciation for 2016 Book value at the end of 2016 Less: Depreciation for 2017 Book value at the end of 2017 $2,080,000 $520,000 [$2080000 x 2 x (1/8 years) --> Dep. under double-declining method] $1,560,000 $390,000 ($1560000 x 2 x (1/8 years) -> Dep. under double-declining method] $1,170,000

Correct position: Capitalized cost Less: Depreciation for 2016 Book value at the end of 2016 Less: Depreciation for 2017 Book value at the end of 2017 $1,960,000 [$2080000 - $120000] $490,000 ($1960000 x 2 x (1/8 years) --> Dep. under double-declining method] $1,470,000 $367,500 [$1470000 x 2 x (1/8 years) --> Dep. under double-declining method] $1,102,500 Excess in accumulated depreciation $52,500 [($520000 + $390000) - ($490000 + $367500)] 2) When there is a change in method of depreciation, the asset shall be depreciated over remaining estimated useful life under revised depreciation method but using correct book value at the beginning of the accounting period in which the change in depreciation method takes place. Therefore, Credit General Journal Depreciation Expense Accumulated Depreciation Debit $183,750 $183,750 Workings: Correct Book value at the end of 2017 Less: Estimated residual value at the end Depreciable correct capitalized cost Remaining life of the asset concerned (years) Correct annual depreciation for next 6 years $1,102,500 (As calculated in Part-1 under CORRECT POSITIONI $0 $1,102,500 6 [8 years - 2 years] $183,750 ($1102500 / 6 years]