Question

Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $2,072,000. This cost figure included the following expenditures: Purchase price $ 1,910,000 Freight charges 36,000 Installation charges 26,000 Annual maintenance charge 100,000 Total $ 2,072,000 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. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2021. 2. Ignoring income taxes, prepare any 2021 journal entry(s) related to the change in depreciation methods.

Answer 1

1)
	depreciation recorded under double declining balance method
	depreciation = ( 1 / estimated useful life ) * 2
	depreciation = ( 1/ 8 years ) * 2
	depreciation = 25 %
	depreciation for 2019 = 25 % * $ 2,072,000
	depreciation for 2019 = $ 518,000
	depreciation for 2020= 25 % * ( $ 2,072,000 - $ 518,000 )
	depreciation for 2020= $ 388,500.
	correct depreciation :
	cost of office equipment = purchase price +freight charges+ installation charges
	here, annual maintenance charge is not added to office equipment cost
	because it is not capital expenditure and annual maintenance is a expense.
	office equipment cost = $ 1,910,000 +$ 36,000 +$26,000
	office equipment cost = $ 1,972,000
	depreciation for 2019 = 25 % * $ 1,972,000
	depreciation for 2019 = $ 493,000
	depreciation for 2020= 25 % * ( $ 1,972,000 - $ 493,000 )
	depreciation for 2020= $ 369,750

YEAR	GENERAL JOURNAL	DEBIT	CREDIT
2019	ENTRIES MADE:
	equipment	$ 2,072,000
	cash		$ 2,072,000
	( to record   puchase of equipment is made )
2019	CORRECT ENTRY :
	equipment ( 1,910,000+36,000+26,000)	$ 1,972,000
	expense	$ 100,000
	cash		$ 2,072,000
	( to record correct puchase of equipment )
2019	ENTRIES MADE:
	depreciation expense	$ 518,000
	accumulated depreciation		$ 518,000
	( to record depreciation expense is made)
2019	CORRECT ENTRY :
	depreciation expense	$ 493,000
	accumulated depreciation		$ 493,000
	( to record correct depreciation expense )
2020	ENTRIES MADE:
	depreciation expense	$ 388,500
	accumulated depreciation		$ 388,500
	( to record depreciation expense is made)
2020	CORRECT ENTRY :
	depreciation expense	$ 369,750
	accumulated depreciation		$ 369,750
	( to record correct depreciation expense )
2021	explanation given below in note 1:
	Retained earning	$ 56,250
	accumulated depreciation	$ 43,750
	equipment		$ 100,000
	( to record equipment cost overstated by $100,000)
2)
YEAR	GENERAL JOURNAL	DEBIT	CREDIT
2021	explanation given below in note 2:
	depreciation expense	$ 184,875
	accumulated depreciation		$ 184,875
	( to record depreciation expense under straight line )

EXPLANATION :
note 1:
equipment overstated by $ 100,0000 , then retained earnings overstated by $ 100,000
excess depreciation = ( $ 518,000+$ 388,500 ) - ( $ 493,000 +$ 369,750 )
excess depreciation = $ 43,750
then retained earnings understated by $ 43,750 so , accumulated depreciation overstated by
$ 43,750 . So, retained earnings = ( $ 100,000 -$ 43,750 )= $ 56,250
note 2:
the change in depreciation method is treated as change in estimate
2021 Book value = { $ 1,972,000 - ( $ 493,000 + $ 369,750 ) } = $ 1,109,250
residual value = $ 0
remaining life = ( 8 years - 2 years)= 6 years
depreciation expense under straight line depreciation method:
depreciation expense = ( book value - residual value ) / estimated remaining useful life
depreciation expense = ( $ 1,109,250 - $ 0 ) / 6 years
deprecaition expense= $ 184,875