Collins Corporation purchased office equipment at the beginning of 2014 and capi
ID: 2450972 • Letter: C
Question
Collins Corporation purchased office equipment at the beginning of 2014 and capitalized a cost of $2,008,000. This cost figure included the following expenditures:
Purchase price $ 1,840,000
Freight charges 29,000
Installation charges 19,000
Annual maintenance charge 120,000
Total $ 2,008,000
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 2014 and 2015. In 2016, after the 2015 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.
1.
Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Ignoring income taxes, prepare any 2016 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.)
2.Ignoring income taxes, prepare any 2016 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.)
Explanation / Answer
calculated depreciation
Double declining rate = 1/8*2 = 25%
Actual that should be
Depreciation expense was overstated by (878,500 - 826,000)$52,500 and $120,000 expense was understated net effect $67,500 net income overstated
journal entry
2)
Assets cost ( after correction ) $1888,000
Accumulated depreciation 826,000
Undepreciable cost jan 2016 1062,000
Depreciation for remaining six years 6
Depreciation $177,000
Journal entry
2008,000 @25% $502,000 1506,000 @25% $376,500 Total depreciation $878,500