1) | |||
depreciation recorded under double declining balance method | |||
depreciation = ( 1 / estimated useful life ) * 2 | |||
depreciation = ( 1/ 8 years ) * 2 | |||
depreciation = 25 % | |||
depreciation for 2019 = 25 % * $ 2,036,000 | |||
depreciation for 2019 = $ 509,000 | |||
depreciation for 2020= 25 % * ( $ 2,036,000 - $ 509,000 ) | |||
depreciation for 2020= $ 381,750. | |||
correct depreciation : | |||
cost of office equipment = purchase price +freight charges+ installation charges | |||
here, annual maintenance charge is not added to office equipment cost | |||
because it is not capital expenditure and annual maintenance is a expense. | |||
office equipment cost = $ 1,880,000 +$ 33,000 +$23,000 | |||
office equipment cost = $ 1,936,000 | |||
depreciation for 2019 = 25 % * $ 1,936,000 | |||
depreciation for 2019 = $ 484,000 | |||
depreciation for 2020= 25 % * ( $ 1,936,000 - $ 484,000 ) | |||
depreciation for 2020= $ 363,000 |
YEAR | GENERAL JOURNAL | DEBIT | CREDIT |
2019 | ENTRIES MADE: | ||
equipment | $ 2,036,000 | ||
cash | $ 2,036,000 | ||
( to record puchase of equipment is made ) | |||
2019 | CORRECT ENTRY : | ||
equipment ( 1,880,000+33,000+23,000) | $ 1,936,000 | ||
expense | $ 100,000 | ||
cash | $ 2,036,000 | ||
( to record correct puchase of equipment ) | |||
2019 | ENTRIES MADE: | ||
depreciation expense | $ 509,000 | ||
accumulated depreciation | $ 509,000 | ||
( to record depreciation expense is made) | |||
2019 | CORRECT ENTRY : | ||
depreciation expense | $ 484,000 | ||
accumulated depreciation | $ 484,000 | ||
( to record correct depreciation expense ) | |||
2020 | ENTRIES MADE: | ||
depreciation expense | $ 381,750 | ||
accumulated depreciation | $ 381,750 | ||
( to record depreciation expense is made) | |||
2020 | CORRECT ENTRY : | ||
depreciation expense | $ 363,000 | ||
accumulated depreciation | $ 363,000 | ||
( to record correct depreciation expense ) | |||
2021 | explanation given below in note 1: | ||
Retained earning | $ 56,250 | ||
accumulated depreciation | $ 43,750 | ||
equipment | $ 100,000 | ||
( to record equipment cost overstated by $100,000) | |||
2) | |||
YEAR | GENERAL JOURNAL | DEBIT | CREDIT |
2021 | explanation given below in note 2: | ||
depreciation expense | $ 181,500 | ||
accumulated depreciation | $ 181,500 | ||
( to record depreciation expense under straight line ) |
EXPLANATION : | ||||||||
note 1: | ||||||||
equipment overstated by $ 100,0000 , then retained earnings overstated by $ 100,000 | ||||||||
excess depreciation = ( $ 509,000+$ 381,750 ) - ( $ 484,000 +$ 363,000 ) | ||||||||
excess depreciation = $ 43,750 | ||||||||
then retained earnings understated by $ 43,750 so , accumulated depreciation overstated by | ||||||||
$ 43,750 . So, retained earnings = ( $ 100,000 -$ 43,750 )= $ 56,250 | ||||||||
note 2: | ||||||||
the change in depreciation method is treated as change in estimate | ||||||||
2021 Book value = { $ 1,936,000 - ( $ 484,000 + $ 363,000 ) } = $ 1,089,000 | ||||||||
residual value = $ 0 | ||||||||
remaining life = ( 8 years - 2 years)= 6 years | ||||||||
depreciation expense under straight line depreciation method: | ||||||||
depreciation expense = ( book value - residual value ) / estimated remaining useful life | ||||||||
depreciation expense = ( $ 1,089,000 - $ 0 ) / 6 years | ||||||||
deprecaition expense= $ 181,500 |
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