Collins Corporation purchased office equipment at the beginning of 2016 and capi
ID: 2532826 • Letter: C
Question
Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,036,000. This cost figure included the following expenditures:
Purchase price $ 1,880,000 Freight charges 33,000 Installation charges 23,000 Annual maintenance charge 100,000 Total $ 2,036,000 Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,036,000. This cost figure Included the following expenditures: Purchase price Freight charges Installation charges Annual maintenance charge Total $1,880,000 33,000 23,000 100,000 $2,036,000 The company estimated an eight-year useful llfe for the equipment. No residual value is anticlpated. The double-declining-balance method was used to determine depreclation 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. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018. 2. Ignoring income taxes, prepare any 2018 journal entry(s) related to the change in depreclation methods. Complete this question by entering your answers in the tabs below Required 1Required 2 Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the correcting entry for the equipment capitalization error discovered in 2018 Note: Enter debits before credits. Event General Journal Debit CreditExplanation / Answer
(Amount in $)
Correct
Incorrect
(Should have been recorded)
(As recorded)
2016
Equipment
1936000
Equipment
2036000
Expense
100000
To Cash
2036000
To Cash
2036000
2016
Dep. Expense (1)
484000
Dep. Expense (2)
509000
To Accum. Dep.
484000
To Accum. Dep.
509000
2017
Dep. Expense (3)
363000
Dep. Expense (4)
381750
To Accum. Dep.
363000
To Accum. Dep.
381750
1)
[$1936000 X 25% (2times the straight line rate of 12.5%(2 X (1/8))]
2)
$2036000 X 25%
3)
($1936000-$484000) X 25%
4)
($2036000-$509000) X 25%
During the two year period, depreciation expense is overrated by $43750, but other expenses were understated by $100000, so net income during the period was overstated by $56250, which means retained earnings is currently overstated by that amount.
To Correct Incorrect accounts
Retained Earnings
56250
Accum. Depreciation
43750
To Equipment
100000
2018 Book Value = [$1936000 – (484000 + 363000)] = $1089000
Residual Value = $0
Remaining Life = 6 years (8-2)
Straight line Depreciation = 1089000/6 = $181500
Dep. Expense
181500
To Accum. Dep.
181500
Correct
Incorrect
(Should have been recorded)
(As recorded)
2016
Equipment
1936000
Equipment
2036000
Expense
100000
To Cash
2036000
To Cash
2036000
2016
Dep. Expense (1)
484000
Dep. Expense (2)
509000
To Accum. Dep.
484000
To Accum. Dep.
509000
2017
Dep. Expense (3)
363000
Dep. Expense (4)
381750
To Accum. Dep.
363000
To Accum. Dep.
381750