Question

Problem 20-11 Error correction; change in depreciation method [LO20-6]

The Collins Corporation purchased office equipment at the beginning of 2016 and capitalized a cost of $2,180,000. This cost included the following expenditures:

Purchase price	$	1,970,000
Freight charges		42,000
Installation charges		32,000
Annual maintenance charge		136,000
Total	$	2,180,000

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 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 & 2. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018 and any 2018 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.)

Answer 1

Cost of machine purchased on 1.1.2016				$2,180,000
Useful life estimated				8 years
Amount of depreciation charged per year
Double declining method				12.5% x 2 =	25%
Straight line method:
Cost of machine purchased on 1.1.2016				$2,180,000
			Less:	$136,000
				$                2,044,000.00
Useful life estimated				8 years
Amount of depreciation should've been charged =				$ 2,044,000 / 8 years =	$ 255,500.00

	Double Declining Balance Method
Year	Cost	Opening WDV	Depreciation	Closing WDV
2016	$ 2,180,000.00	$ 2,180,000.00	$   545,000.00	$ 1,635,000.00
2017		$ 1,635,000.00	$   408,750.00	$ 1,226,250.00
Total			$   953,750.00
	Straight line method
Year	Cost	Opening WDV	Depreciation	Closing WDV
2016	$ 2,044,000.00	$ 2,044,000.00	$   255,500.00	$ 1,788,500.00
2017		$ 1,788,500.00	$   255,500.00	$ 1,533,000.00
Total			$   511,000.00
Excess depreciation charged to machine =			$ 953,750 - $ 511,000
			$   442,750.00

Depreciation for 2 years has been charged to Annual maintenance expenses
Balance of Annual maintenance expense at the beginning of 2018
Year	Cost	Opening WDV	Depreciation	Closing WDV
2016	$      136,000.00	$      136,000.00	$      34,000.00	$      102,000.00
2017		$      102,000.00	$      25,500.00	$        76,500.00
2018		$        76,500.00

			Journals
1) For adjusting the equipment capitalization error
	Annual Maintenance charge A/c         Dr.			$                      76,500.00
	To Equipment A/c				$    76,500.00
2) For adjusting the excess depreciation charged
	Equipment A/c		Dr.	$                   383,250.00
	To Accumulated Depreciation A/c				$ 383,250.00
				*($ 442,750 - $ 34,000 - $ 25,500)

*Since we're deducting the depreciated value of annual maintenance charge from equipment a/c , while increasing the value of equipment a/c with the excess depreciation charged over the past two years, we must deduct the amount of depreciation charged on annual maintenance charge from the amount of excess depreciation calculated above.

For your knowledge:

You can double check the answer by this way-

Closing balance of equipment A/c as on 2017 after charging depreciation under DDB method = $ 1,226,250

Add: Adjusted amount of excess depreciation charged =                                                        $ 383,250

Less: Depreciated value of annual maintenance charge =                                                        $ 76,500

                                                                                                                                          $ 1,533,000

The opening balance of equipment account on 2018 must be $ 1,533,000.00 (correct value, as per question's instructions)