Question

Problem 21-8 On December 31, 2020, before the books were closed, management and the accountant at Flanagan Inc. made the following determinations about three depreciable assets. 1. Depreciable asset A (building) was purchased on January 2, 2017. It originally cost $564,000 and the straight-line method was chosen for depreciation. The asset was originally expected to be useful for 10 years and have no residual value. In 2020, the decision was made to change the depreciation method from straight-line to double-declining-balance due to a change in the pattern of benefits received. The estimates relating to useful life and residual value remained unchanged. 2. Depreciable asset B (machinery) was purchased on January 3, 2016. It originally cost $193,500 and the straight-line method was chosen for depreciation. The asset was expected to be useful for 15 years and have no residual value. In 2020, the decision was made to shorten this asset’s total life to nine years and to estimate the residual value at $4,000. 3. Depreciable asset C (equipment) was purchased on January 5, 2016. The asset’s original cost was $174,000 and this amount was entirely expensed in 2016 in error. This particular asset has a 10-year useful life and no residual value. The straight-line method is appropriate. The accountant mentioned that the corporation was experiencing a higher than expected number of bad debt write offs in the current year. For this reason, the bad debts percentage of accounts receivable used in the year-end adjustment was changed from 6.5% to 8%. The bad debt expense for the current year was calculated using the new rate of 8%. The controller estimates that, if the new rate had been used in the past, an additional $15,000 worth of bad debts would have been recorded. Additional Information: 1. Income in 2020 before depreciation expense amounted to $413,000. 2. Depreciation expense on assets other than A, B, and C t otalled $70,100 in 2020. 3. Income in 2019 was reported at $384,000. 4. In both 2019 and 2020, 100,000 common shares were outstanding. No dividends were declared in either year. Flanagan Inc. follows IFRS. Prepare any necessary entries in 2020. (To correct for error) and (To correct for error) Answer the following questions, ignoring all income tax effects. Calculate the adjusted net income and earnings per share for 2019 and 2020. Prepare comparative retained earnings statements for Flanagan Inc. for 2019 and 2020. The company reported retained earnings of $205,000 at December 31, 2018. Show your calculations

Answer 1

ASSET A
Origional Cost of Building		564000
Expected Useful Life		10 Year
otal depreciable amount for the life of the asset		564000
annual depreciation rate	100%/10 Years	10%
Rate as per method (Twice of actual rate0		20%	20%	20%	20%
DOUBLE DECLINE BALANCE DEPRECIATION
Year	2017-18	18-19	19-20	20-21	21-22
	1	2	3	4	5
Book value at beginning	564000.00	451200.00	360960.00	288768.00	231014.40
Depreciation exp	112800.00	90240.00	72192.00	57753.60	46202.88
Ending book value	451200.00	360960.00	288768.00	231014.40	184811.52
STRAIGHT LINE METHOD
	1	2	3	4	5
Book value at beginning	564000	507600	451200	394800	338400
Depreciation exp	56400	56400	56400	56400	56400
Ending book value	507600	451200	394800	338400	282000
ASSETS B
Origional Cost of MAchinery		193500
Expected Useful Life		15 Year
Expected Useful Life(Revised)		10 Year
Salvage Value		4000
Net Value (Cost - salvage value)		189500

STRAIGHT LINE METHOD	2016-17	2017-18	2018-19	2019-20	2020-21
	1	2	3	4	5
Book value at beginning	193500.00	180600.00	167700.00	154800.00	141900.00
Depreciation exp	12900.00	12900.00	12900.00	12900.00	12900.00
Ending book value	180600.00	167700.00	154800.00	141900.00	129000.00
STRAIGHT LINE METHOD	2016-17	2017-18	2018-19	2019-20	2020-21
	1	2	3	4	5
Book value at beginning	193500.00	174550.00	155600.00	136650.00	117700.00
Depreciation exp	18950.00	18950.00	18950.00	18950.00	18950.00
Ending book value	174550.00	155600.00	136650.00	117700.00	98750.00
ASSETS B
Origional Cost of Equipment		174000
Expected Useful Life(Revised)		10 Year
Salvage Value		0
Net Value (Cost - salvage value)		174000
STRAIGHT LINE METHOD	2016-17	2017-18	2018-19	2019-20	2020-21
	1	2	3	4	5
Book value at beginning	174000.00	156600.00	139200.00	121800.00	104400.00
Depreciation exp	17400.00	17400.00	17400.00	17400.00	17400.00
Ending book value	156600.00	139200.00	121800.00	104400.00	87000.00

Journal entries in 2020
Fixed Assets A/c   Dr	90240.00
To Depreciation A/c		90240
( Dep Addback for building)
Bad debts A/c Dr	15000.00
To Profit and loss A/c		15000.00
Depreciation A/c Dr	56400.00
To Fixed Assets A/c		56400.00
( Dep Charged to Building)
Depreciation A/c Dr	4650.00
To Fixed Assets A/c		4650.00
( Dep Charged to Machinery for old FY)
Depreciation A/c Dr	18950.00
To Fixed Assets A/c		18950.00
( Dep Charged to Building)
Depreciation A/c Dr	52200.00
To Fixed Assets A/c		52200.00
( Dep Charged to Equipments for old FY)
Depreciation A/c Dr	17400.00
To Fixed Assets A/c		17400.00
( Dep Charged to Equipments)
Machinery A/c	174000.00
To Profit and Loss A/c		174000.00
(Asset Written back)
Year 2020
Profit Before adjustment		413000.00
Add
Depreciation wrieen back for Building	90240.00
Machinery Written back	174000.00	264240.00
Less
Dep other than A,B,C Assets	70100.00
Bad debts provision	15000.00
Dep on building	56400.00
Previous year dep on Machinery	4650.00
Dep on Machinery	18950.00
Dep on Equipments	52200.00	217300.00
Net profit after adjustment		459940.00

Calculation of EPS
	2018	2019	2020
Net Profit in 2019                                             A	205000	384000	459940.00
No of shares                                                       B	100000	100000	100000
EPS   (A/B)	2.05	3.84	4.60