On January 1, 2016, the Mills Car Repair Company acquired equipment at a cost of $55,000. At that time, the equipment was estimated to have a residual value of $5,000 at the end of an estimated five-year service life. During 2016 and 2017, the company recorded straight-line depreciation on the equipment.
Required:
Prepare all the journal entries for 2018 relating to the equipment for each of the following independent situations (ignoring income taxes):
?
a.
Assume that the company switched to sum-of-the-years'-digits depreciation at the beginning of 2018 with a new estimated remaining life of four years.
b.
Assume, instead, that at the beginning of 2018, the equipment is determined to have a five-year remaining service life. Straight-line depreciation will still be used.
c.
Assume, instead, that at the beginning of 2018 the company discovered that it had erroneously ignored the estimated residual value in the computation of its depreciation for 2016 and 2017.
What will be an ideal response?
| a. | Depreciation Expense | 12,000* | ? | |||
| ? | ? | Accumulated Depreciation-Equipment | ? | 12,000 | ||
| ? | ? | |||||
| ? | * | Because depreciation changes are considered changes in accounting estimate, the book value at the date of the change becomes the basis for future depreciation. | ||||
| ? | ? | ? | ? | |||
| ? | Cost | $55,000 | ? | |||
| ? | ($55,000-$5,000)´2/5 | 20,000 | ? | |||
| ? | Book value at 1/1/2016 | $35,000 | ? | |||
| ? | ? | ? | ? | |||
| ? | 2018 Depreciation: ($35,000-5,000)´4/10 = $12,000 | |||||
| ? | ? | |||||
| b. | Depreciation Expense | 6,000* | ? | |||
| ? | ? | Accumulated Depreciation-Equipment | ? | 6,000 | ||
| ? | ? | ? | ? | |||
| ? | * | ($55,000-$20,000-$5,000)/5 | ? | ? | ||
| ? | ? | ? | ? | |||
| c. | Accumulated Depreciation-Equipment | 2,000* | ? | |||
| ? | ? | Retained Earnings | ? | 2,000 | ||
| ? | ? | ? | ? | |||
| ? | * | ($55,000/5)´2 = | $22,000 | Incorrect depreciation to date | ||
| ? | ? | ($50,000/5)´2 = | 20,000 | Correct depreciation to date | ||
| ? | ? | ? | $ 2,000 | Adjustment | ||
| ? | ? | |||||
| ? | Depreciation Expense ($50,000/5) | 10,000 | ? | |||
| ? | ? | Accumulated Depreciation-Equipment | ? | 10,000 | ||
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