Problem 22-2 Novak Company is in the process of preparing its financial statemen
ID: 2329429 • Letter: P
Question
Problem 22-2
Novak Company is in the process of preparing its financial statements for 2017. Assume that no entries for depreciation have been recorded in 2017. The following information related to depreciation of fixed assets is provided to you.
2016
2015
Prepare the journal entries to record depreciation expense for 2017 and correct any errors made to date related to the information provided. (Ignore taxes.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No.
Account Titles and Explanation
Debit
Credit
(To record current year depreciation.)
(To correct prior year depreciation.)
Show comparative net income for 2016 and 2017. Income before depreciation expense was $280,000 in 2017, and was $330,000 in 2016. (Ignore taxes.)
NOVAK COMPANY
Comparative Income Statements
For the Years 2017 and 2016
2017
2016
1. Novak purchased equipment on January 2, 2014, for $85,400. At that time, the equipment had an estimated useful life of 10 years with a $5,400 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2017, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $3,200 salvage value. 2. During 2017, 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 $30,000. The following computations present depreciation on both bases for 2015 and 2016.Explanation / Answer
.1 Straight line depreciation per year=(85400-5400)/10=$ 8,000
N
A
B
C=85400-B
Year
Depreciation
Accumulated Depreciation
End of year book value
2014
$8,000
$8,000
$77,400
2015
$8,000
$16,000
$69,400
2016
$8,000
$24,000
$61,400
Additional Information on January 2,2017:
Remaining useful life=4 years
Salvage Value=$3200
New Depreciation per year=(61400-3200)/4= $ 14,550
Journal entry in 2017:
Debit
Credit
Depreciation expense
$ 14,550
Accumulated Depreciation
$ 14,550
.2.
Total Depreciation in two years as per declining balance method=(60000+48000)=$108,000
Total Depreciation in two years as per Straight Line method=(27000+27000)=$54,000
Reduction in depreciation=(108000-54000)=$54,000
Increase in net income=$54,000
Increase in retained earnings=$54,000
Retained earning accounts should be increased and accumulated depreciation reduced.
This is accomplished through the following journal entries:
Account
Debit
Credit
Accumulated Depreciation
$ 24,000
Cumulative Effect of Change in Accounting Principle
24,000
Journal entry for depreciation of 2017:
Debit
Credit
Depreciation expense
$ 27,000
Accumulated Depreciation
$ 27,000
Cumulative effect of change in accounting principle will be included in Income Statement and will increase net income , consequently the Retained earnings.
3
Annual depreciation(without considering salvage value)=110000/8=$13,750
Annual depreciation, considering salvage value=(110000-20000)/8=$11,250
Depreciation recorded in 2015 =13750/2=$6,875
Depreciation recorded in 2016=$13,750
Total Depreciation recorded in two years=6875+13750=$20,625
Depreciation in two years considering salvage value:
(11250/2)+11250=$16,875
Excess depreciation recorded=(20625-16875)=$3,750
Depreciation to be recorded in 2017=$11250-$3750= $ 7,500
Accounting entry in 2017 for depreciation:
Debit
Credit
Depreciation expense
$ 7,500
Accumulated Depreciation
$ 7,500
No.
Account Titles and Explanation
Debit
Credit
1
Depreciation expense
$14,550
Accumulated Depreciation
$14,550
2
Depreciation expense
$27,000
Accumulated Depreciation
$27,000
Cumulative effect of change in accounting principle
$24,000
3
Depreciation expense
$7,500
Accumulated Depreciation
$7,500
(To Record Depreciation expenses)
Accumulated Depreciation
$24,000
Cumulative effect of change in accounting principle
$24,000
(To correct prior year depreciation)
Total depreciation expense in 2016=8000+48000+13750=$69,750
Total Depreciation expense in 2017=14550+27000+7500=$49,050
NOVAK COMPANY
Comparative Income Statements
For the Years 2017 and 2016
2017
2016
Income before depreciation expense
$280,000
$330,000
Depreciation expense
$49,050
$69750
Net income
$230,950
$260,250
N
A
B
C=85400-B
Year
Depreciation
Accumulated Depreciation
End of year book value
2014
$8,000
$8,000
$77,400
2015
$8,000
$16,000
$69,400
2016
$8,000
$24,000
$61,400
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