The Collins Corporation purchased office equipment at the beginning of 2014 and

Question

The Collins Corporation purchased office equipment at the beginning of 2014 and capitalized a cost of $2,000,000. This cost included the following expenditures:

     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 2014 and 2015.

     In 2016, after the 2015 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.

Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2016 and any 2016 journal entry(s) 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.)

  

          

The Collins Corporation purchased office equipment at the beginning of 2014 and capitalized a cost of $2,000,000. This cost included the following expenditures:

Explanation / Answer

Solution:

1) Analysis:

Working Note:

Depreciation Recorded:

2014 = 2,000,000 * 25% = 500,000

2015 = (2,000,000 - 500,000) * 25% = 375,000

Correct Depreciation:

2014 = 1,900,000 * 25% (2 times the straight-line rate of 12.5%) = 475,000

2015 = (1,900,000 – 475,000) * 25% = 356,250

During the two-year period, depreciation expense was overstated by $43,750, but other expenses were understated by $100,000, so net income during the period was overstated by $56,250, which means retained earnings is currently overstated by that amount.

During the two-year period, accumulated depreciation was overstated, and continues to be overstated by $43,750.

To correct incorrect accounts:

2) This is a change in accounting estimate resulting from a change in accounting principle.

No entry is needed to record the change.

2016 adjusting entry:

A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. Accordingly, the Collins Corporation reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from now on. The undepreciated cost remaining at the time of the change is depreciated straight-line over the remaining useful life.

Annual straight-line depreciation = 1,068,750/6 = 178,125

Correct Incorrect (Should Have Been Recorded) (As Recorded) Date General Journal Debit Credit General Journal Debit Credit 2014 Equipment 1,900,000 Equipment 2,000,000 Expense 100,000 Cash 2,000,000 Cash 2,000,000 2014 Depreciation Expense 475,000 Depreciation Expense 500,000 Accumulated depreciation 475,000 Accumulated depreciation 500,000 2015 Depreciation Expense 356,250 Depreciation Expense 375,000 Accumulated depreciation 356,250 Accumulated depreciation 375,000

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