Question

Question 1 Shamrock 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. Shamrock purchased equipment on January 2, 2017, for $86,700. At that time, the equipment had an estimated useful life of 10 years with a $4,700 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 $3,100 salvage value. 2. During 2020, Shamrock 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. Shamrock purchased a machine on July 1, 2018, at a cost of $120,000. The machine has a salvage value of $18,000 and a useful life of 8 years. Shamrock’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 comparative net income for 2019 and 2020. Income before depreciation expense was $280,000 in 2020, and was $320,000 in 2019. (Ignore taxes.) SHAMROCK COMPANY Comparative Income Statements For the Years 2020 and 2019 2020 2019 Income before depreciation expense $ $ Depreciation expense Net income $ $

Answer 1

1. To determine the 2020 depreciation of the equipment we must first calculate the book value of the equipment as of January 2, 2020

Straight-Line Method (Cost - Salvage Value) / Useful Life

Cost	86,700
Salvage Value	4,700
Useful Life (Years)	10
Annual Depreciation	8,200
Accumulate Depreciation at January 02, 2020 (Annual Depreciation x 3 Years)	24,600
Book Value Jan 02, 2020	62,100

Once the book value on January 2, 2017, has been calculated, the new annual depreciation of the equipment will be calculated

Book Value Jan 02, 2020	62,100
Less: Salvage Value	3,100
Depreciable Cost	59,000
Remaining Useful Life (in Years)	4
Annual Depreciation	$14,750
Depreciation at Dec 31, 2020	$14,750

2.

Buildings Depreciation Expense	2019	2018	Total
Straight-line	27,900	27,900	55,800
Declining-balance	49,600	62,000	111,600
Differences	21,700	34,100	55,800

Fixed Asset	Cost	Salvage value	Useful Life	Annual Depreciation	Depreciacion Expense 2020
Building	$310,000	$31,000	10	$27,900	$27,900

3. The Company machine's depreciation calculations do not include the salvage value, so the correct depreciation calculations must be made and the accumulated depreciation account adjusted.

Straight-Line Methos Depreciation (Cost - Salvage Value) / Useful Life

	Bookkeeper	Correct Calculations	Differences
Date	July 01, 2018	July 01, 2018
Cost	$120,000	$120,000
Salvage Value	$0	$18,000
Useful Life (Years)	8	8
Annual Depreciacion	15,000	12,750
Depreciation 2018	7,500	6,375	1,125
Depreciation 2019	15,000	12,750	2,250
Depreciation 2020		12,750

Journal entries on Dec 31, 2020

1. Equipment Depreciation Expense Dr. 14,750

To Equipment Accumulate Depreciation 14,750

2. Building Accumulate Depreciation Dr. 55,800

To Earning Retained 55,800

3. Building Depreciation Expense Dr. 27,900

To Building Accumulate Depreciation 27,900

4. Machine Accumulate Depreciation Dr. 3,375[1,125 + 2,250]

To Earning Retained 3,375

5. Machine Depreciation Expense Dr. 12,750

To Machine Accumulate Depreciation 12,750

(b) Comparative net income for 2019 and 2020

	2020	2019
Income before depreciation expense	280,000	320,000
Depreciation expense	(55,400)	(72,800)
Net Income	224,600	247,200

	2020	2019
Equipment	14,750	8,200
Building	27,900	49,600
Machine	12,750	15,000
Depreciation expense	55,400	72,800