ACCT 3200B Dr. James Review Problem - Depreciation, change in estimates, effects

Question

ACCT 3200B Dr. James Review Problem - Depreciation, change in estimates, effects of errors On January 2, 2015, Sandy Inc. purchases equipment for $84,000. The estimated useful life is five years and the estimated salvage (residual value) is $4,000. The equipment is expected to produce $160,000 units of product. A. Calculate depreciation expense for 2016 assuming utilization of the: 1. Straight-line method 2. Sum of the years digits method 3. Double-declining balance method 4. Activity-based method (units-of-production method). Production during 2016: 38,000 units. B: Assume that Sandy Inc. utilized the straight-line depreciation method and after 3 three years estimates that the total useful life of the equipment will be 6 years. Prepare the journal entry to recognize depreciation expense for year 4 (i.e., 2018). C: Assume the accountant recognizes the acquisition of the equipment as an expense. If the error is not discovered, what would be the effect on the 2016 financial statements? Indicate U for understatement, O for overstatement and N if there is no effect on the financial statement category. Also indicate the amount of any over- or understatements. Assets Liabilities Equity Net Income D. Refer to the original information and assume that the Double-declining balance method was used. In good form, show the balance sheet presentation for the equipment at 12/31/16

Explanation / Answer

A) Deprectaion for 2016 under different method 1) Straighline method Purchase price net of salvage value 80000 Estimated useful life 5 Depreciation per year 16000 2) Sum of years digit method Sum Of years=(1+2+3+4+5)= 15 Deprectaion for 2016=(4/15 of 80000) 21333 3) Double declining Balance method Rate of depreciation= (Double of straighline rate) 40% Deprectaion for 2016( 40% 0f 48000) 19200 4) Activity Based Purchase price net of salvage value 80000 Expected units to be produced 160000 Deprecation rate per unit 0.5 No of units produced in 2016 38000 Depreciation for 2016 19000 B) Journal entry for deprection on basis of 6 years Depreciation for 3years on basis of original estimated life of 5 years 48000 Depreciation for 3years on basis of revised estimated life of 6 years 40000 Excess depreciation charged that needs to be reversed 8000 Entry for reversing excess charge Accumulated depreciation account Dr 8000          Depreciation account 8000 C If Equipment is recognised as expense Asset Liabilities Equity Net Income (U) by 80000 U by 16000 N U by 64000 D) Presentation of equipment under double declining method as on 31/12/2016 Equipment 80000 Less: Accumulated depreciation 51200 WDV as on 31/12/2016 28800

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