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Chapter 22: Q2P. (page 1315)

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鈥檚 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.)

Short Answer

Expert verified

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

Step by step solution

01

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)

02

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)

03

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)

04

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

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Most popular questions from this chapter

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.

(Error Correction Entries) The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years.

These items are:

1. At the beginning of 2016, the company purchased a machine for \(510,000 (salvage value of \)51,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years.

2. At the end of 2017, the company failed to accrue sales salaries of \(45,000.

3. A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional \)85,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the \(85,000 to a loss account in 2018.

4. Gingrich Company purchased a copyright from another company early in 2016 for \)45,000. Gingrich had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.

5. In 2018, the company wrote off $87,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. Instructions Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.

Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.

1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.

2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.

3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with 鈥淩etirement benefits鈥� on the income statement.

5. Correction of a mathematical error in inventory pricing made in a prior period.

6. A change from presentation of statements of individual companies to presentation of consolidated statements.

7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially.

8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Instructions Identify the type of change that is described in each item above and indicate whether the prior year鈥檚 financial statements should be recast when presented in comparative form with the current year鈥檚 financial statements

A partial trial balance of Julie Hartsack Corporation is as follows on December 31, 2018.

Dr. Cr.

Supplies \( 2,700

Salaries and wages payable \) 1,500

Interest receivable 5,100

Prepaid insurance 90,000

Unearned rent 鈥�0鈥�

Interest payable 15,000

Additional adjusting data:

1. A physical count of supplies on hand on December 31, 2018, totaled \(1,100.

2. Through oversight, the Salaries and Wages Payable account was not changed during 2018. Accrued salaries and wages on December 31, 2018, amounted to \)4,400.

3. The Interest Receivable account was also left unchanged during 2018. Accrued interest on investments amounts to \(4,350 on December 31, 2018.

4. The unexpired portions of the insurance policies totaled \)65,000 as of December 31, 2018.

5. \(28,000 was received on January 1, 2018, for the rent of a building for both 2018 and 2019. The entire amount was credited to rent revenue.

6. Depreciation on equipment for the year was erroneously recorded as \)5,000 rather than the correct figure of \(50,000.

7. A further review of depreciation calculations of prior years revealed that equipment depreciation of \)7,200 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Instructions

(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2018? (Ignore income tax considerations.)

(c) Repeat the requirements for items 6 and 7, taking into account income tax effects (40% tax rate) and assuming that the books have been closed.

Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year鈥檚 income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon鈥檚 2017 journal entry to record the change in accounting principle.
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