Question

Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $1,902,000. This cost figure included the following expenditures: Purchase price Freight charges Installation charges Annual maintenance charge Total $1,760,000 21,000 11,000 110,000 $1,902,000 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 2016 and 2017. 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. 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.

Answer 1

Collins Corporation Requirement 1 Depreciation Recorded: DDB = 2 x (1 + 8) = 25% 2016-25% x 1,902,000 = $475,500 2017-25% x (1,902,000 -475,500) = $356,625 Correct Depreciation: 2016 -25% x 1,792,000 = $448,000 2017-25% (1,792,000 -448,000) = $336,000

Enteries made Date Particulars 2016 Equipment a/c To Cash Dr. Debit in $ Credit in $ 1902000 1902000 Proper Entries Date Particulars 2016 Equipment a/c Expense a/c To Cash Dr. Dr. Debit in $ Credit in $ 1792000 110000 1902000 2016 Dr. 475500 Depreciation Expense a/c TO Accum. Depre 475500 2016 448000 Depr Depreciation Expense a/c TO Accum. Depre 448000 2017 Dr. 356625 Depreciation Expense a/c TO Accum. Depre 356625 2017 336000 Depreciation Expense a/c To Accum. Depre 336000 Equipment overstated by 110,000; R/E overstated by 110,000 Excess depreciation = (475,000 + 356,625) -(448,000 + 336,000) = 47625 R/E understated by 47,625; Acc Dep'n overstated by 47,625 R/E (110,000 -47,625) a/c Dr. Accumulated depreciation a/c Dr. To Equipment 62375 47625 110000

Requirement 2 The change in depreciation method is treated as a change in estimate. 2018 Book value = (1,792,000 - (448,000 + 336,000)] = $1,008,000 Residual value = $0 Remaining life = 6 years (8-2) Straight-line depreciation = 1,008,000 + 6 = $168,000 Date 2018 Particulars Depreciation Expense a/c To Accum. Depre Dr. Debit in $ Credit in $ 168000 168000