Question

Problem 22-02 Stellar Company is in the process of preparing its financial statements for 2020. Assume that no entries for depreciation have been recorded in 2020. The following information related to depreciation of fixed assets is provided to you. 1. Stellar purchased equipment on January 2, 2017, for $89,100. At that time, the equipment had an estimated useful life of 10 years with a $5,100 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2020, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $2,800 salvage value. 2. During 2020, Stellar changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $310,000. It had a useful life of 10 years and a salvage value of $31,000. The following computations present depreciation on both bases for 2018 and 2019. 2019 2018 Straight-line $27,900 $27,900 Declining-balance 49,600 62,000 3. Stellar purchased a machine on July 1, 2018, at a cost of $120,000. The machine has a salvage value of $20,000 and a useful life of 8 years. Stellar’s bookkeeper recorded straight-line depreciation in 2018 and 2019 but failed to consider the salvage value.

Prepare the journal entries to record depreciation expense for 2020 and correct any errors made to date related to the information provided. (Ignore taxes.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) No. Account Titles and Explanation Debit Credit 1. 2. 3. (To record current year depreciation.) (To correct prior year depreciation.) SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT LINK TO TEXT

Show comparative net income for 2019 and 2020. Income before depreciation expense was $310,000 in 2020, and was $320,000 in 2019. (Ignore taxes.) STELLAR COMPANY Comparative Income Statements For the Years 2020 and 2019 2020 2019 Income before depreciation expense $ $ Depreciation expense Net income $ $

Answer 1

Solution:

A)

Journal entries:

Date	Particulars	Debit	Credit
1	Depreciation expenses	$15,275
	Accumulated depreciation		$15,275
	(Being equipment depreciation expenses recorded)
2	Depreciation expenses	$20,925
	Accumulated depreciation		$20,925
	(Being building depreciation expenses recorded)
3	Depreciation expenses	$14,166
	Accumulated depreciation		$14,166
	(Being machine depreciation expenses recorded)

Working:

1)Purchase on 2 jan = $89,100

salvage value =$5,100

Life = 10 years

Depreciation = $89,100 - $5,100 /10

=8,400 per year

On 2nd jan :

Salvage value = $2,800

Life = 4 years

Book value as on 2nd Jan 2017 = $89,100 -($8,400*3)

=$63,900

Deprecitaion thereafter = 63,900 - 2,800/ 4

=$15,275

2) Building:

Cost of building	$310,000
Less: Deprciation
2019	($62,000)
2020	($49,600)
Book value	$198,400
Less: Salvage value	($31,000)
Depreciation value	$167,400
Remaining useful life	8 years
Depreciation per year	$20,925

3) Machine:

Depreciation recorded in 2019 and 2020

Machine cost =$120,000

Useful life       =8 years

Depreciation   =$15,000 per year

Book value on 2021 = $120,000 - (15,000*2)

                                =$105,000

less:Salvage value          =$20,000

Depreciation cost             =$85,000

Life                                    =6 years

Depreciation                     =$14,166

B)

Statement of net income for 2019 & 2020

	2019	2020
Income before depreciation expense	$320,000	$310,000
Less: Depreciation expense	$50,366	$72,166
net income	$269,634	$237,834

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