Question

# Collins Corporation purchased office equipment at the beginning of 2019 and capitalized a cost of \$1,976,000....

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.

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

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