Question

Novak 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. Novak purchased equipment on January 2, 2017, for $86,300. At that time, the equipment had an estimated useful life of 10 years with a $5,300 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, Novak changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $300,000. It had a useful life of 10 years and a salvage value of $30,000. The following computations present depreciation on both bases for 2018 and 2019. 2019 2018 Straight-line $27,000 $27,000 Declining-balance 48,000 60,000 3. Novak 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. Novak’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.)

Show comparative net income for 2019 and 2020. Income before depreciation expense was $310,000 in 2020, and was $340,000 in 2019. (Ignore taxes.)

Answer 1