On December 31, 2017, before the books were closed, the management and accountan
ID: 2536525 • Letter: O
Question
On December 31, 2017, before the books were closed, the management and accountants of Buffalo Inc. made the following determinations about three pieces of equipment.
Additional data:
5.100,100 shares of common stock were outstanding in 2016 and 2017.
Prepare all necessary entries in 2017 to record these determinations.
Prepare comparative retained earnings statements for Buffalo Inc. for 2016 and 2017. The company had retained earnings of $200,500 at December 31, 2015.
1. Equipment A was purchased January 2, 2014. It originally cost $538,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2017, the decision was made to change the depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to useful life and salvage value remained unchanged. 2. Equipment B was purchased January 3, 2013. It originally cost $183,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero residual value. In 2017, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at $3,100. 3. Equipment C was purchased January 5, 2013. The asset’s original cost was $158,600, and this amount was entirely expensed in 2013. This particular asset has a 10-year useful life and no residual value. The straight-line method was chosen for depreciation purposes.Explanation / Answer
1. Depreciation A/c Dr. 120,370
To Equipment A/c 120,370
(Being depreciation charged on 94150 on equipment A and 26220 on B. Depreciation is not chargeable on Equipment C as it has already being expensed in the year of purchase)
Calculation of Depreciation charged above:
Equipment A:
Original cost 538,000
Depreciation charge for Financial years 2014, 2015 and 2016= (538,000/10)*3= 161,400
Book value on 01.01.2017= 376,600
Sum of year of digit from 1 to 7 = 28
Depreciation for 2017 = (376,600/28)*7 = 94,150
Equipment B:
Original Cost of Asset = 183,000
Useful lifeof assets = 15 years
Depreciation per annum = 183,000/15 = 12,200
Depreciation already charged for 2013, 2014, 2015 and 2016 = 12,200*4 = 48,800
Book value as on 01.01.2017 = 134,200
Salvage Value = 3,100
Revised Depreciation for subsequent years = (134,200-3,100)/5 = 26,220
Here we have taken 5 years as total lifeof asset is assumed to be 9 years and 4 years have already been elapsed.
2. Comparative retained earnings statements for Buffalo Inc. for 2016 and 2017
Particulars 2016 2017 Opening Balance 200,500 571,400 Income before Depreciation 370,900 397,100 Depreciation 0 (175,270) Closing Balance 571,400 793,230Related Questions
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