Question

Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $2,058,000. This cost figure included the following expenditures: Purchase price Freight charges Installation charges Annual maintenance charge Total $1,890,000 34,000 24,000 110,000 $2,058,000 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:

Depreciation recorded under double declining balance method:

Depreciation = ( 1 / estimated useful life ) * 2

Depreciation = ( 1/ 8 years ) * 2

Depreciation = 25 %

Depreciation for 2019 = 25 % * $ 2,058,000

Depreciation for 2019 = $ 514,500

Depreciation for 2020= 25 % * ( $ 2,058,000 - $ 514,500 )

Depreciation for 2020= $ 385,875.

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 = $ 1,890,000 +$ 34,000 +$24,000

Office equipment cost = $ 1,948,000

Depreciation for 2019 = 25 % * $ 1,948,000

Depreciation for 2019 = $ 487,000

Depreciation for 2020= 25 % * ( $ 1,948,000 - $ 487,000 )

Depreciation for 2020= $ 365,250.

Year	General journal	Debit($)	Credit($)
2019	Entries made:
	Equipment	2,058,000
	Cash		2,058,000
	(To record purchase of equipment is made)
2019	Correct entry:
	Equipment ($1,890,000+$34,000+$23,000)	1,948,000
	Expense	110,000
	Cash		2,058,000
	(To record correct purchase of equipment)
2019	Entries made:
	Depreciation expense	514,500
	Accumulated depreciation		514,500
	(To record depreciation expense is made)
2019	Correct entry:
	Depreciation expense	487,000
	Accumulated depreciation		487,000
	(To record correct depreciation expense)
2020	Entries made:
	Depreciation expense	385,875
	Accumulated depreciation		385,875
	(To record depreciation expense is made)
2020	Correct entry:
	Depreciation expense	365,250
	Accumulated depreciation		365,250
	(To record correct depreciation expense)
2021	Explanation given below in note 1:
	Retained earning	61,875
	Accumulated depreciation	48,125
	Equipment		110,000
	(To record equipment cost overstated by

Note 1:

Equipment overstated by $ 110,000 , then retained earnings overstated by $ 110,000

Excess depreciation = ( $ 514,500+$ 385,875 ) - ( $ 487,000 +$ 365,250 )  

Excess depreciation = $ 48,125

Then retained earnings understated by $ 48,125 so , accumulated depreciation overstated by $ 48,125 .

So, retained earnings = ( $ 110,000 -$ 48,125 )= $ 61,875.

Requirement 2:

Year	General journal	Debit ($)	Credit ($)
2021	Explanation given below in note 2:
	Depreciation expense	182,625
	Accumulated depreciation		182,625
	(To record depreciation expense under straight line)

Note 2:

The change in depreciation method is treated as change in estimate

2021 Book value = { $ 1,948,000 - ( $ 487,000 + $ 365,250 ) } = $ 1,095,750

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 = ( $ 1,095,750 - $ 0 ) / 6 years

Deprecaition expense= $ 182,625.

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