Question

Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $2,000,000. This cost figure included the following expenditures: Purchase price Freight charges Installation charges Annual maintenance charge Total $1,850,000 30,000 20,000 100,000 $2,000,000 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 2019 and 2020. In 2021, after the 2020 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. Required: 1. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2021. 2. Ignoring income taxes, prepare any 2021 journal entry(s) related to the change in depreciation methods.

Answer 1

ANSWER

Requirement -1

Analysis:

Correct Incorrect (Should Have Been Recorded) (As Recorded) 2019 Equipment 1,900,000 Equipment 2,000,000 Expense 100,000 Cash 2,000,000 Cash 2,000,000 2019 Expense 475,000 [1] Expense 500,000[2] Accum. 500.000 Accum. deprec. 475,000 deprec. 356,250 2020 Expense Expense 375,000[4] Accum. 375.000 Accum. deprec. 356.250 deprec

[1] $1,900,000 x 25% (2 times the straight-line rate of 12.5%) [2] $2,000,000 x 25% [3] ($1,900,000 - 475,000) x 25% [4] ($2,000,000 - 500,000 ) x 25% During the two-year period, depreciation expense was overstated by S43,750, but other expenses were understated by $100,000, so net income during the period was overstated by $56,250, which means retained earnings is currently overstated by that amount. During the two-year period, accumulated depreciation was overstated, and continues to be overstated by $43,750. To correct incorrect accounts Retained earnings 56,250 Accumulated depreciation 43,750 Equipment 100,000

Requirement-2

This is a change in accounting principle accounted for as a change in estimate. No entry is needed to record the change. 2021 adjusting entry: Depreciation expense (determined below) 178,125 Accumulated depreciation 178,125 A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. Accordingly, the Collins Corporation reports the change prospectively, previous financial statements are not revised. Instead, the company simply straight-line method from now on. The undepreciated cost remaining at the time of the change is depreciated straight-line over the remaining useful life.

Asset's cost (after correction) $1,900,000 Accumulated depreciation to date (5475,000 + 356,250) (831,250) Undepreciated cost, Jan. 1,2021 1,068,750 Estimated residual value (0) To be depreciated over remaining 6 years 1,068,750 years Annual straight-line depreciation 2021 - 2026 $ 178,125

_____________________________________________

If you have any query or any Explanation please ask me in the comment box, i am here to helps you.please give me positive rating.

*****************THANK YOU**************