Question

Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of $1,976,000. This cost figure included the following expenditures:

Purchase price	$	1,830,000
Freight charges		28,000
Installation charges		18,000
Annual maintenance charge		100,000
Total	$	1,976,000

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

Calculated Depreciation

Double Declining rate = 1/8*2

= 25%

1976000*25%	$4,94,000
1482000*25%	$370.500
Total Depreciation	$864,500

That Should be

187,600*25%	$469,000
140,7000*25%	$351,750
	$820,750

• Depreciation expense was overstated by

→ (864500 - 820750 ) $43750 and $10,00,000 expense was understated net effect $56,250 net income overstated

• Journal Entry

Retained Earnings	$56,250
Accumulated depriciation	$43,750
To Equipment		$1,00,000

( 2 )

Asset Cost	18,76,000
Accumulated depriciation	8,20,750
Undepriciable cost jan 2021	10,55,250
Depriciation for the remaining six years	6
Depriciation	1,75,875

• Journal Entry

Depriciation Expense	$1,75,875
To Accumulated depriciation		$1,75,875