Question

Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $1,938,000. This cost figure included the following expenditures: Purchase price Freight charges Installation charges Annual maintenance charge Total $1,790,000 24,000 14,000 110,000 $1,938,000 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 non income thror nranare the annronriate correcting entry for the ecurinment.catalization s covered in

Answer 1

Solution:

	Correct				Incorrect
	(Should have been recorded)				(As Recorded)
Date	General Journal	Debit	credit		General Journal	Debit	Credit
2019	Equipment	83,800			Equipment	193,800
	Expense	110,000			Cash		193,800
	Cash		193,800
2019	Depreciation expense	20,950			Depreciation expense	48,450
	Accumulated depreciation		20,950		Accumulated depreciation		48,450
2020	Depreciation expense	15,712			Depreciation expense	36,337
	Accumulated depreciation		15,712		Accumulated depreciation		36,337

Working note:

Depreciation recorded:

2019 = 193,800 * 25% = 48,450

2020 =(193,800 - 48,450)*25% = 36,337

Correct Depreciation:

2019 = 83,800 * 25% (2 times the straight-line rate of 12.5%) = 20,950

2020 = (83,800 - 20,950) * 25% = 15,712

During the two-year period, depreciation expense was overstated by $48,125, but other expenses were understated by $110,000, so net income during the period was overstated by $61,875, 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 $48,125

To correct incorrect accounts

Retained earnings	61,875
Accumulated depreciation	48,125
Equipment		110,000

2) This is a change in accounting estimate resulting from a change in accounting principle.

No entry is needed to record the change.

2021 adjusting entry

Depreciation expense	7,856
Accumulated depreciation		7,856

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 employs the 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)	83,800
Accumulated depreciation to date (20,950 + 15,712)	- 36,662
Undepreciated cost Jan 1 2021	47,138
Estimated residual value	0
To be depreciation over remaining 6 years	47,138
Annual straight line depreciation	7,856

Annual straight line depreciation = 47,138 / 6 = 7,856