Collins Corporation purchased office equipment at the beginning of 2011 and capi
ID: 2548221 • Letter: C
Question
Collins Corporation purchased office equipment at the beginning of 2011 and capitalized a cost of $1,972,000. This cost figure included the following expenditures:
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 2011 and 2012.
1. Ignoring taxes, prepare the appropriate correcting entry for the equipment capitalization error.
2. Ignoring income taxes, prepare any journal entries related to the change in depreciation methods.
Collins Corporation purchased office equipment at the beginning of 2011 and capitalized a cost of $1,972,000. This cost figure included the following expenditures:
Explanation / Answer
1) The capitalized cost of equipment should not include annual maintenace charge of $120,000, hence the amount of $120,000 needs to be deducted from the capitalized cost of equipment.
The appropriate correcting entry for the equipment capitalization error is shown as follows:-
2) Firstly we need to calculate total depreciation charged in 2011 and 2012 and depreciation that should have been charged in 2011 and 2012.
Depreciation rate under double declining method = (1/8 yrs)*2 = 25%
Depreciation charged in 2011 = $1,972,000*25% = $493,000
Depreciation charged in 2012 = ($1,972,000 - $493,000)*25% = $369,750
Total Depreciation Charged in 2011 and 2012 = $493,000+$369,750 = $862,750
Total Depreciation that should be charged
Depreciation for 2011 = ($1,972,000 - $120,000)*25% = $1,852,000*25% = $463,000
Depreciation for 2012 = ($1,852,000 - $463,000)*25% = $347,250
Total Depreciation for 2011 and 2012 = $463,000+$347,250 = $810,250
Hence excess depreciation charged of $52,500 ($862,750 - $810,250) need to be reversed.
Journal Entry (Amounts in $)
Account Titles Debit Credit Annual Maintenance Charge 120,000 Equipment 120,000 (To record the correcting wntry for capitalization error)