Question

Problem 20-11 Error correction; change in depreciation method [LO20-6]

The Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,225,000. This cost included the following expenditures:

Purchase price	$	2,000,000
Freight charges		45,000
Installation charges		35,000
Annual maintenance charge		145,000
Total	$	2,225,000

The company estimated an ten-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 & 2. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018 and any 2018 journal entry(s) related to the change in depreciation methods. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Depriciation Expense
			Wrong Double Declining		Straight Line		Correct Double Declining
Years	Cost/Opening Balance		Depriciation	Closing Balance	Depriciation	Closing Balance	Depriciation	Closing Balance
	Correct	Wrong
2016	$2,080,000.00	$2,225,000.00	$445,000.00	$1,780,000.00	$416,000.00	$1,664,000.00	$416,000.00	$1,664,000.00
2017	$1,664,000.00	$1,780,000.00	$356,000.00	$1,424,000.00	$416,000.00	$1,248,000.00	$332,800.00	$1,331,200.00
2018	$1,331,200.00	$1,424,000.00	$284,800.00	$1,139,200.00	$416,000.00	$832,000.00	$266,240.00	$1,064,960.00
		Uptill Depriciation recognized		$801,000.00
			Balance	$1,424,000.00
		Uptill Correct Depriciation		$748,800.00
			Balance	$1,331,200.00
		Depriciation excess Charged		$52,200.00
On Change from Double Declining to Straight Line Asset Balance Should as it should have been if straight line method was followed
		If Staright Line method was followed
			Balance	$1,248,000.00
	Current Balance after Error Correction			$1,331,200.00
		Asset to be reduced by		$83,200.00
Description			Debit	Credit
In 2018
Office Equipment			$52,200.00
	Depriciation			$52,200.00
(Depriciation excess charged debited to asset A/c)
Depriciation			$83,200.00
	Office Equipment			$83,200.00
Value of Equipment Brought down according
to straight line method)

Thank You

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