Collins Corporation purchased office equipment at the beginning of 2011 and capi
ID: 2550501 • 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
Part 1:-
Depreciation Recorded: DDB = 2 x (1 ÷ 8) = 25%
2011 – 25% x 1,972,000 = $493,000
2012 – 25% x (1,972,000 – 493,000) = $369,750
Correct Depreciation:
2011 – 25% x 1,852,000 = $463,000
2012 – 25% x (1,852,000 – 463,000) = $347,250
Entries Made
2011 Equipment 1,972,000
Cash 1,972,000
2011 depriciation exp 493,000
Acc Dep. 493,000
2012 Depriciation exp 375,000
Acc Dep. 375,000
Proper Entries
2011 Equipment 1,852,000
Expenses 120,000
Cash 1,972,000
2011 Depriciation exp 463,000
Acc Dep. 463,000
2012 Depriciation exp 347,250
Acc Dep. 347,250
Equipment overstated by 120,000; R/E overstated by 120,000
Excess depreciation = (493,000 + 375,000) – (463,000 + 347,250) = 57,750
R/E understated by 57,750; Acc Dep’n overstated by 57,750
R/E (120,000 – 57,750) 62,250
Accumulated depreciation 57,750
Equipment 120,000
Part 2:-
The change in depreciation method is treated as a change in estimate.
2013 Book value = [1,852,000 – (463,000 + 347,250)] = $1,041,750
Residual value = $0
Remaining life = 6 years (8 – 2)
Straight-line depreciation = 1,041,750 ÷ 6 = $173,625
Depreciation expense 173,625
Accumulated depreciation 173,625