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

Question:

The Collins Corporation purchased office equipment at the beginning of 2014 and capitalized a cost of $2,270,000. This cost included the following expenditures:

Purchase price $2,030,000
Freight charges 48,000
Installation charges 38,000
Annual maintenance charge 154,000
Total $2,270,000

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 expenses 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.

Accounting Errors:

When accounting errors that affect both income statement and balance sheet accounts are discovered after the financial statements have been issued, the entry to correct the error will have an impact on the beginning balance of the Retained Earnings account.

Answer and Explanation: 1


We will first calculate what the effect of the error is on the beginning carrying value of the equipment because we must correct that against Retained Earnings.

Then we will also calculate the new annual depreciation, using the new depreciation method. This is a change in accounting estimate, and it is only implemented prospectively.

With error Wothout error
Cost of equipment $2,270,000 $2,116,000
Depreciation @ 25% (double the straight-line rate of 12.50%) for 2014 (567,500) (529,000)
Book value Dec 31 2014 $1,702,500 $1,587,000
Depreciation for 2015 @ 25% on book value (425,625) (396,750)
Book value Dec 31 2015 $1,276,875 $1,190,250

Our first journal entry will adjust the carrying amount of the asset to $1,190,250 by crediting it with $86,625 ($1,276,875 - $1,190,250) and debiting Retained Earnings. The entry to Retained Earnings represents the correction for the maintenance costs that were understated in 2014 and the depreciation expense that were overstated in 2014 and 2015.

The depreciation expense for 2016 using the new straight-line method is:

Carrying value on the date of change $1,190,250
Remaining useful life 6 years
Straight-line depreciation $198,375


The journal entries are:

Date Description Debit Credit
Dec 31 2016 DR Retained Earnings $86,625
DR Accumulated depreciation - Offce equipment $67,375
CR Office equipment at cost $154,000
To correct an error when the cost of office equipment was recorded in 2014
Dec 31 2016 DR Depreciation $198,375
CR Accumulated depreciation - Offce equipment $198,375
To record depreciaiton on office equipment

Learn more about this topic:

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Identifying Accounting Errors: Types & Importance

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Chapter 10 / Lesson 1
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Discover how to identify accounting errors and see different types and their importance. Review accounting errors before seeing the error of principle, transposition and commission errors, rounding errors and errors of omission, and counterbalancing errors.


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