Question

2 Problem 20-11 Error correction; change in depreciation method [LO020-6] The Colins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,195,000. This cost included the following expenditures ints $1,988,8ee 43,080 33,080 Annual maintenance charge 139,80 $2,195,000 Purchase price Freight charges Installation charges Total dThe company estimated an ten-year useful ife 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 this equipment At that time, the company's controller discovered that the original cost of the of annual maintenance charges for the equipment -line depreciation method for equipment incorrectly included one year t Required: prepare the appropnate correcting entiy tor the equipment capitalization error discovered in 2018 and is required for a transaction/event, select "No ату 2018 ournal entry s relatedto the change in depreciation methods th journel entry required" in the first account field.)

Answer 1

1. Preparation of the correcting entry for the equipment capitalization error discovered in 2018:

Depreciation Recorded –

DDB = (1/10) * 2 = 20%

2016 = $ 2,195,000 * 20% = $ 439,000

2017 = ($ 2,195,000 – 439,000) * 20% = $ 315,200

Rectified Depreciation –

2016 = $ 2,056,000 * 20% = $ 411,200

2017 = ($ 2,056,000 – 411,200) * 20% = $ 328,960

			Without Rectification		Rectified
Date	Particulars		Debit	Credit	Debit	Credit
2016	Equipment		2,195,000		2,056,000
	Expense				139,000
	Cash			2,195,000		2,195,000
	Depreciation Expense		439,000		411,200
	Accumulated Depreciation			439,000		411,200
2017	Depreciation Expense		315,200		328,960
	Accumulated Depreciation			315,200		328,960

Therefore, equipment is overstated by $ 139,000 and R/E overstated by $ 139,000

Excess Depreciation – (439,000+315,200) – (411,200+328,960) = $ 14,040

R/E (139,000 – 14,040)                             124,960

Accumulated Depreciation                      14,040

Equipment                                                                                        139,000

2. The change in depreciation method is considered as change in estimate

2018 Book Value = $ 2,056,000 – (411,200+328,960) = $ 1,315,840

Remaining Life = 10 – 2 = 8 years

Straight Line Depreciation = $ 1,315,840 / 8 years = $ 164,480

Depreciation Expense                                           164,480

Accumulated Depreciation                                                          164,480

Answer 2

($ 2,195,000 – 439,000) * 20% = $ 315,200 actual 351200