P22-1B (Change in Estimate and Error Correction) Bishop Way Company is in the pr
ID: 2452663 • Letter: P
Question
P22-1B (Change in Estimate and Error Correction) Bishop Way Company is in the process of preparing
its financial statements for 2014. Assume that no entries for depreciation have been recorded in 2014. The
following information related to depreciation of fixed assets is provided to you.
1. Bishop Way purchased equipment on January 2, 2010, for $142,000. At that time, the equipment had
an estimated useful life of 8 years with a $6,000 salvage value. The equipment is depreciated on a
straight-line basis. On January 2, 2014, as a result of additional information, the company determined
that the equipment has a remaining useful life of 6 years with a $2,000 salvage value.
2. During 2014, Bishop Way changed from the double-declining-balance method for its warehouse to
the straight-line method. The building originally cost $620,000. It had a useful life of 20 years and a
salvage value of $20,000. The following computations present depreciation on both bases for 2012
and 2013.
2013 2012
Straight-line $30,000 $30,000
Declining-balance 55,800 62,000
3. Bishop Way purchased a machine on July 1, 2011, at a cost of $72,000. The machine has a salvage
value of $9,000 and a useful life of 6 years. Bishop Way’s bookkeeper recorded straight-line depreciation
in 2012 and 2013 but failed to consider the salvage value.
Instructions
(a) Prepare the journal entries to record depreciation expense for 2014 and correct any errors made to
date related to the information provided.
(b) Show comparative net income for 2013 and 2014. Income before depreciation expense was $420,000
in 2014, and was $386,000 in 2013. (Ignore taxes.)
Explanation / Answer
A. Journal Entries:
1. Depreciation A/c Dr. 12,000
To Equipment A/c Cr. 12,000
( being revised depreciation value in 2014 charged to equipment A/c )
From 2010-2013, Depreciation = (Equipment - Salvage value)/ Estimated useful life.
= (142,000-6,000)/8
= 17,000
From 2014 onwards, revised depreciation = {[142,000- (17,000*4)] - 2,000}/6
= 12,000
2. Depreciation A/c Dr. 30,000
To Warehouse A/c Cr. 30,000
( Being depreciation charged on straight line basis to Warehouse )
Depreciation A/c Dr. 57,800
To P&L A/c. Cr. 57,800.
( Being adjustment entry passed for over charged depreciation in prior period, due to change in accounting
policy )
Excess depreciation for 2012 & 2013 = 55800+ 62,000 - (30,000*2) = 57,800
3. Depreciation A/c Dr. 10,500
To Machinery A/c Cr. 10,500
( Being depreciation for 2014 provided )
Machinery A/c Dr. 3,000
To depreciation A/c Cr. 3,000
( Being rectification entry to adjust excess depreciation charged in earlier years 2012 & 2013)
Depreciation for 2014 = (72,000-9,000) /6
= 10500
But, Depreciation charged in 2012 & 2013 = 72,000/6 = 12,000
So, the difference of excess depreciation charged = (12000-10,500)*2 = 3,000 is rectified.
B. Comparative Income statement for 2013 and 2014.
Particulars 2013 2014
Income before depreciation 420,000 386,000
Less: Depreciation
1. On equipment (17,000) (12,000)
2. On Warehouse (62,000) 27,800 [ 57800- 30,000]
3. On machinery (12,000) (7,500) [10,500- 3,000]
Income after Depreciation = 329,000 394,300
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