Collins Corporation purchased office equipment at the beginning of 2016 and capi
ID: 2593580 • Letter: C
Question
Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,116,000. 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 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 depreciation methods.
Explanation / Answer
Depreciation recorded: 2* 1/8 = 25%
2016 : 25% * 2,116,000 = 529,000
2017 : 25% * (2,116,000-529000) = 396,750
Correct depreciation
2016: [1,930,000+38000+28000]*25% = 499,000
2017: ([1,930,000+38000+28000]- 499,000)*25% = 374,250
2011: entries made:
Equipment__________________ 2,116,000
cash 2,116,000
Date
Particulars
Debit
Credit
Correct entry
2016
Equipment
1996000
Expense
120000
Cash
2116000
entry made:
2016
Depreciation
529000
Accumulated depreciation
529000
Correct entry
2016
Depreciation
499000
Accumulated depreciation
499000
2017
entry made:
Depreciation
396750
Accumulated depreciation
396750
2017
Correct entry
Depreciation
374250
Accumulated depreciation
374250
equipment overstated by 120,000
Excess depreciation
52500
(529000+396750)-(499000+374250)
Retained earnings
67500
Accumulated depreciation
52500
equipment
120000
$
2017
Book value
1100250
1996000-(499,000+374,250)
Residual value
0
Remaining life
6 years
Straight line dep
183375
Depreciation
183375
Accumulated depreciation
183375
Date
Particulars
Debit
Credit
Correct entry
2016
Equipment
1996000
Expense
120000
Cash
2116000
entry made:
2016
Depreciation
529000
Accumulated depreciation
529000
Correct entry
2016
Depreciation
499000
Accumulated depreciation
499000
2017
entry made:
Depreciation
396750
Accumulated depreciation
396750
2017
Correct entry
Depreciation
374250
Accumulated depreciation
374250
equipment overstated by 120,000
Excess depreciation
52500
(529000+396750)-(499000+374250)
Retained earnings
67500
Accumulated depreciation
52500
equipment
120000