Question

The Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $2,308,000. This cost included the following expenditures:

Purchase price	$	2,020,000
Freight charges		48,000
Installation charges		38,000
Annual maintenance charge		202,000
Total	$	2,308,000

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 2019 and 2020.

In 2021, after the 2020 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 2021 and any 2021 journal entries 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. Round your final answers to the nearest whole dollar.) requirement 3 Record the 2021 adjusting entry for depreciation.

Answer 1

1& 2

Find DDB depreciation

100/useful life*2

=100/8) *2

=25%

DDB

Year	Beginning book value	Rate	Deprciation	Ending book value
2019	$2,308,000	25%	$577,000 [$2,308,000*25%]	$1,731,000
2020	$1,731,000	25%	$432,750	$1,298,250 [$1,731,000-432,750]

Correct depreciation (excluding maintenance charges)

Year	Beginning book value	Rate	Depreciation	Ending book value
2019	$2,106,000	25%	$526,500 [$2,106,000*25%]	$1,579,500 [$2,106,000-$526,500]
2020	$1,579,500	25%	$394,875	$1,184,625

equipment is overstated by $202,000 and retained earnings overstated by $202,000 (annual expenses capitalised by mistake)

For depreciation ($577,000+$432,750) -($526,500+$394,875) =$88,375 acumulated depreciation overstated and retained earnings understated(depreciation overbooked)

Net retained earnings effect = $202,000-$88,375=$113,625 overstated so we will debit it

Jounral entry:

	Account	debit	Credit
1	Equipment	$2,106,000
	Expense	$202,000
	cash		$2,308,000
	[correcting entry for equipment capitalization]
2	Accumulated depreciation	$88,375
	Retained earnings	$113,625
	Equipment		$202,000
	[adjusting entry for depreciation wrongly charged]

3.change in depreciation method

book value at the end of 2020=$1,184,625

years = 8-2 gone (2019&2020) =6

Straight lien depreciation = cost-salvage/useful lfie

=$1,184,625 /6

=$197,438

Journal:

	Depreciation expense	$197,438
	Accumulated depreciation		$197,438