Seved purchased office equipment at the beginning of 2016 and captalized a cost

Question

Seved purchased office equipment at the beginning of 2016 and captalized a cost of $2.008.000. This cost figure included the following expenditures: Purchase price Freight charges Installation charges Annual maintenance charge Total $1,840,880 29,000 19,000 120,800 $2,088,000 The company estimated an eight year useful life for the equipment. No residual value is anticipated. The double-declining-balance method was used to determine depreciation expense for 2016 and 2017 In 2018, after the 2017 financial statements were issued, the company decided to switch to the straight-line depreciation method for this equipment. At that time, the company's controller discovered that the original cost of the equipment incorrectly included one year of annual maintenance charges for the equipment. Required 1. Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018. 2 Ignoring income taxes, prepare any 2018 journal entryís) related to the change in depreciation methods Complete this question by entering your answers in the tabs below Required 1 Required 2 Ignoring income taxes, prepare the appropriate correcting entry for the equipment capitalization error discovered in 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list

Explanation / Answer

Annual maintenance cost is to be expensed to income statement but not to be capitalzed (added to cost)

Depreciation rate = 2 /useful life

             = 2/8 = .25 or 25%

since retained earning is overstated by 120000(amount of maintenance expense not charged ) -52500(excess depreciation charged) = 67500

2)Book value as beginning of [revised cost -correct depreciation]

          = [1888000-826000]=1062000

remaining useful life = 8-2 expired =6

depreciation for 2018= 1062000/6 =177000

Wrong depreciation charged Correct depreciation cost 2,008,000 1,888,000    [2,008,000-120,000] depreciation for 2016 2008000*.25= 502000 1888000*.25= 472000 2017 [2008000-502000]*.25=376500 [1888000-472000]*.25= 354000 Total depreciATION 878500 826000 Depreciation excess charged 878500-826000= 52500

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