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

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