Question

The Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $2,200,000. This cost included the following expenditures:

Purchase price	$	1,960,000
Freight charges		42,000
Installation charges		32,000
Annual maintenance charge		166,000
Total	$	2,200,000

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.)

Answer 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 % * $ 2,200,000

Depreciation for 2019 = $ 550,000

Depreciation for 2020= 25 % * ( $ 2,200,000 - $ 550,000 )

Depreciation for 2020= $ 412,500

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 = $ 1,960,000 +$ 42,000 +$32,000

Office equipment cost = $ 2,034,000

Depreciation for 2019 = 25 % * $ 2,034,000

Depreciation for 2019 = $ 508,500

Depreciation for 2020= 25 % * ( $ 2,034,000 - $ 508,500 )

Depreciation for 2020= $ 381,375

Required 1 :
EVENT	GENERAL JOURNAL	DEBIT	CREDIT
2019	ENTRIES MADE:
	Equipment	$ 2,200,000
	Cash		$ 2,200,000
	( to record   purchase of equipment is made )
2019	CORRECT ENTRY :
	Equipment ( 1,960,000+42,000+32,000)	$ 2,034,000
	Expense	$ 166,000
	Cash		$ 2,200,000
	( to record correct purchase of equipment )
2019	ENTRIES MADE:
	Depreciation expense	$ 550,000
	Accumulated depreciation		$ 550,000
	( to record depreciation expense is made)
2019	CORRECT ENTRY :
	Depreciation expense	$ 508,500
	Accumulated depreciation		$ 508,500
	( to record correct depreciation expense )
2020	ENTRIES MADE:
	Depreciation expense	$ 412,500
	Accumulated depreciation		$ 412,500
	( to record depreciation expense is made)
2020	CORRECT ENTRY :
	Depreciation expense	$ 381,375
	Accumulated depreciation		$ 381,375
	( to record correct depreciation expense )
2021	explanation given below in note 1:
	Retained earning { $ 166,000 -$72,625 )	$ 93,375
	Accumulated depreciation	$ 72,625
	Equipment		$ 166,000
	( to record equipment cost overstated by $166,000)

Required 2 :
EVENT	GENERAL JOURNAL	DEBIT	CREDIT
1) 2021	NO journal entry
	( this is change in accounting estimate resulting from
	a change in accounting principle )
2)    2021	explanation given below in note 2:
	Depreciation expense	$ 190,688
	Accumulated depreciation		$ 190,688
	( to record depreciation expense under straight line )

EXPLANATION :

Note 1:

Equipment overstated by $ 166,000 then retained earnings overstated by $ 166,000

Excess depreciation = ( $ 550,000+$ 412,500 ) - ( $ 508,500 +$ 381,375 )

Excess depreciation = $ 72,625

then retained earnings understated by $ 72,625 so , accumulated depreciation overstated by

$ 72,625 . So, retained earnings = ( $ 166,000 -$ 72,625 )= $ 93,375

Note 2:

The change in depreciation method is treated as change in estimate

2021 Book value = { $ 2,034,000 - ( $ 508,500 + $ 381,375 ) } = $ 1,144,125

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 = ( $ 1,144,125 - $ 0 ) / 6 years

Deprecation expense = $ 190,688 (Rounded)