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Q2P.

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Intermediate Accounting (Kieso)
Found in: Page 1315

Short Answer

Holtzman 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.

1. Holtzman purchased equipment on January 2, 2014, for $85,000. At that time, the equipment had an estimated useful life of 10 years with a $5,000 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 $3,000 salvage value.

2. During 2017, Holtzman 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. 2016 2015 Straight-line $27,000 $27,000 Declining-balance 48,000 60,000

3. Holtzman purchased a machine on July 1, 2015, at a cost of $120,000. The machine has a salvage value of $16,000 and a useful life of 8 years. Holtzman’s bookkeeper recorded straight-line depreciation in 2015 and 2016 but failed to consider the salvage value.

Instructions (a) Prepare the journal entries to record depreciation expense for 2017 and correct any errors made to date related to the information provided. (Ignore taxes.)

(b) Show comparative net income for 2016 and 2017. Income before depreciation expense was $300,000 in 2017, and was $310,000 in 2016. (Ignore taxes.)

The depreciation expense for part 1 is $14,500, for part 2 is $20,250, and for part 3 is $13,000.

See the step by step solution

Step by Step Solution

Step 1: Journal entry for part 1

Cost of equipment

85,000

Less: Residual Value

5,000

Depreciable value of equipment

80,000

Annual depreciation

8,000

Book Value as of Jan 2020 (85,000-3*8,000)

61,000

Less: Revised Residual Value

3,000

Revised Depreciable Value of equipment

58,000

Remaining Years

4

Depreciation

14,500

Date

Particulars

Debit ($)

Credit ($)

Depreciation Expense,

14,500

Accumulated Depreciation

14,500

(Being depreciation expense recorded)

Step 2: Journal entry for part 2

Cost of equipment

300,000

Less: Depreciation as per DDB for 2 years

108,000

Book Value as of Jan 2020

192,000

Less:Residual Value

30,000

Depreciable value of equipment

162,000

Remaining Years

8

Depreciation for 2017

20,250

Date

Particulars

Debit ($)

Credit ($)

Depreciation Expense,

20,250

Accumulated Depreciation

20,250

(Being depreciation expense recorded)

Step 3: Journal entry for part 3

Cost of machine

120,000

Less: Residual Value

16,000

Book value as ofJan 2017

104,000

Depreciation wrongly charged

15,000

Correct Depreciation

13,000

Date

Particulars

Debit ($)

Credit ($)

Accumulated Depreciation

2,000

Depreciation Expense

2,000

(Being correction of depreciation expense recorded)

Step 4 Comparative Net Income for 2016 and 2017

2017 ($)

2016 ($)

Income before depreciation expense

300,000

310,000

Less: Depreciation expense

13,000

13,000

Income after depreciation

287,000

297,000

Most popular questions for Business-studies Textbooks

(Analysis of Various Accounting Changes and Errors) Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Consequently, she has proposed the following accounting changes in connection with Mathys Inc.’s 2017 financial statements.

1. At December 31, 2016, the client had a receivable of $820,000 from Hendricks Inc. on its balance sheet. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item.

2. The client proposes the following changes in depreciation policies.

(a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2016, would have been $250,000 less. The effect of the change on 2017 income alone is a reduction of $60,000.

(b) For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years’-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2017. If straight-line depreciation were used, 2017 income would be $110,000 greater.

3. In preparing its 2016 statements, one of the client’s bookkeepers overstated ending inventory by $235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment.

4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If the new accounting method had been used prior to 2017, retained earnings at December 31, 2016, would have been $375,000 less.

5. For the nursery division, the client proposes to switch from FIFO to LIFO inventories because it believes that LIFO will provide a better matching of current costs with revenues. The effect of making this change on 2017 earnings will be an increase of $320,000. The client says that the effect of the change on December 31, 2016, retained earnings cannot be determined.

6. To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the completed-contract method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2016, would have been $1,075,000 greater.

Instructions

(a) For each of the changes described above, decide whether:

(1) The change involves an accounting principle, accounting estimate, or correction of an error.

(2) Restatement of opening retained earnings is required.

(b) What would be the proper adjustment to the December 31, 2016, retained earnings?

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