P22-1 (Change in Estimate and Error Correction) Holtzman Company is in the proce

ID: 2453021 • Letter: P

Question

P22-1 (Change in Estimate and Error Correction) Holtzman 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. Holtzman purchased equipment on Jan 2, 2011, for $85,000 At the 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, 2014, 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. During 2014, 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 2012 and 2013. 2013 2012 Straight-line $27,000 $27,000 Declining balance $48,000 $60,000 3. Holtzman purchased a machine on July 1, 2012, 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 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. (1) Cost of equipment Amount Less: Salvage value Amount Depreciable cost Formula Depreciation to 2014 2011 Amount Number Formula 2012 Amount Number Formula 2013 Amount Number Formula Formula Depreciation in 2014 Cost of equipment Amount Less: Depreciation to 2014 Amount Book value, January 1, 2014 Formula Less: Salvage value Amount Depreciable cost Formula Remaining years Number Depreciation in 2014 Formula Account title Amount Account title Amount (2) Cost of building Amount Less: Depreciation to 2014 2012 Amount 2013 Amount Book value, January 1, 2014 Formula Less: Salvage value Amount Depreciable cost Formula Remaining years Number Depreciation in 2014 Formula Account title Amount Account title Amount (3) Account title Amount Account title Amount Account title Amount Account title Amount Depreciation recorded in 2012: [$120,000 ÷ 8 * (1/2)] Amount Depreciation that should be recorded in 2012:
       [($120,000 – $16,000) ÷ 8 * (1/2)] Amount Depreciation recorded in 2013: ($120,000 / 8) Amount Depreciation that should be recorded in 2013:
       [($120,000 – $16,000) ÷ 8] Amount Depreciation taken Depreciation that should be taken Differences 2012 Amount Amount Formula 2013 Amount Amount Formula Formula Formula Formula (b) Show comparative net income for 2013 and 2014. Income before depreciation expense was $300,000 in 2014, and was $310,000 in 2013. Ignore taxes. HOLTZMAN COMPANY Comparative Income Statements For the Years 2014 and 2013 2014 2013 Income before depreciation expense Amount Amount Depreciation Expense Amount Amount Net income Formula Formula Depreciation Expense 2014 2013 Equipment Amount Amount Building Amount Amount Machine Amount Amount Formula Formula P22-1 (Change in Estimate and Error Correction) Holtzman 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. Holtzman purchased equipment on Jan 2, 2011, for $85,000 At the 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, 2014, 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. During 2014, 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 2012 and 2013. 2013 2012 Straight-line $27,000 $27,000 Declining balance $48,000 $60,000 3. Holtzman purchased a machine on July 1, 2012, 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 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. (1) Cost of equipment Amount Less: Salvage value Amount Depreciable cost Formula Depreciation to 2014 2011 Amount Number Formula 2012 Amount Number Formula 2013 Amount Number Formula Formula Depreciation in 2014 Cost of equipment Amount Less: Depreciation to 2014 Amount Book value, January 1, 2014 Formula Less: Salvage value Amount Depreciable cost Formula Remaining years Number Depreciation in 2014 Formula Account title Amount Account title Amount (2) Cost of building Amount Less: Depreciation to 2014 2012 Amount 2013 Amount Book value, January 1, 2014 Formula Less: Salvage value Amount Depreciable cost Formula Remaining years Number Depreciation in 2014 Formula Account title Amount Account title Amount (3) Account title Amount Account title Amount Account title Amount Account title Amount Depreciation recorded in 2012: [$120,000 ÷ 8 * (1/2)] Amount Depreciation that should be recorded in 2012:
       [($120,000 – $16,000) ÷ 8 * (1/2)] Amount Depreciation recorded in 2013: ($120,000 / 8) Amount Depreciation that should be recorded in 2013:
       [($120,000 – $16,000) ÷ 8] Amount Depreciation taken Depreciation that should be taken Differences 2012 Amount Amount Formula 2013 Amount Amount Formula Formula Formula Formula (b) Show comparative net income for 2013 and 2014. Income before depreciation expense was $300,000 in 2014, and was $310,000 in 2013. Ignore taxes. HOLTZMAN COMPANY Comparative Income Statements For the Years 2014 and 2013 2014 2013 Income before depreciation expense Amount Amount Depreciation Expense Amount Amount Net income Formula Formula Depreciation Expense 2014 2013 Equipment Amount Amount Building Amount Amount Machine Amount Amount Formula Formula

Explanation / Answer

Equipment = Depreciation for 2014

85,000-5,000/10=8,000

8,000*3=24,000

Remaining life is 4 years in 2014

Depreciation = 85,000-3,000-24,000/4 = 14,500

Depreciation A/C Dr 14,500

To Equipment Cr 14,500

Building = Straight Line=27,000+27,000 = 54,000

WDV= 60,000+48,000=108,000

108,000-54,000=54,000

Rectification Entry:

Building A/C Dr 54,000

To Depreciation 54,000

Depreciation 27,000

To Building 27,000

Compute the depreciation amount is as follows:

Particulars

Amount($)

Cost of asset

120,000

Salvage value

16,000

Useful life (years)

Depreciation

13,000

Depreciation under old method for 2 years is $30,000

Depreciation under new method for 2 years is $26,000

Now, the year 2 depreciation has to be reduced by $2,000.