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Chapter 22: Q18Q. (page 1306)

In January 2017, installation costs of \(6,000 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of \)30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entry(ies) should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018.

Short Answer

Expert verified

The depreciation expense is $1,620, and the entries for depreciation and the correction of error are recorded.

Step by step solution

01

Calculation of depreciation

Book value (30,000-3,000) +(6,000-600)

32,400

Useful life

20 years

Depreciation expense (32400/20)

1,620

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

Dec 31

Machinery

6,000

Retained earnings (6000/10) *9

5,400

Accumulated depreciation

600

(being the correction of an error recorded)

Dec 31

Depreciation expense

1,620

Accumulated depreciation

1,620

(being depreciation expense recorded)

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Most popular questions from this chapter

Botticelli Inc. was organized in late 2015 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes.

2015 \(140,000a 2017 \)205,000

2016 160,000b 2018 276,000

a Includes a \(10,000 increase because of change in bad debt experience rate.

bIncludes a gain of \)30,000.

The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information.

1. In early 2016, Botticelli Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2015, if a 1% rate had been used, would have been \(10,000. The company therefore restated its net income for 2015.

2. In 2018, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.

2015 2016 2017 2018

Net income unadjusted鈥擫IFO basis \)140,000 \(160,000 \)205,000 \(276,000

Net income unadjusted鈥擣IFO basis 155,000 165,000 215,000 260,000

\) 15,000 \( 5,000 \) 10,000 \( (16,000)

3. In 2018, the auditor discovered that:

(a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by \)14,000 in 2017.

(b) A dispute developed in 2016 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2015, the company was not permitted these deductions, but a tax settlement was reached in 2018 that allowed these expenses. As a result of the court鈥檚 finding, tax expenses in 2018 were reduced by $60,000.

Instructions

(a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.)

(b) Present net income as reported in comparative income statements for the years 2015 to 2018

Which of the following is false?

(a) GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.

(b) The accounting for changes in estimates is similar between GAAP and IFRS.

(c) Under IFRS, the impracticability exception applies both to changes in accounting principles and to the correction of errors.

(d) GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.

Parsons Inc. has proposed a change from one inventory accounting method to another for financial reporting purposes. The auditor indicates that a change would be permitted only if it is to a preferable method. What difficulties develop in assessing preferability?

Discuss how a change to the LIFO method of inventory valuation is handled when it is impracticable to determine previous LIFO inventory amounts.

As part of the year-end accounting process and review of operating policies, Cullen Co. is considering a change in the accounting for its equipment from the straight-line method to an accelerated method. Your supervisor wonders how the company will report this change in principle. He read in a newspaper article that the FASB has issued a standard in this area and has changed GAAP for a 鈥渃hange in estimate that is effected by a change in accounting principle.鈥� (Thus, the accounting may be different from what he learned in intermediate accounting.) Your supervisor wants you to research the authoritative guidance on a change in accounting principle related to depreciation methods.

Instructions

(a) What are the accounting and reporting guidelines for a change in accounting principle related to depreciation methods?

(b) What are the conditions that justify a change in depreciation method, as contemplated by Cullen Co.?

(c) What guidance does the SEC provide concerning the impact that recently issued accounting standards will have on the financial statements in a future period?
See all solutions

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