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Chapter 22: 22-5BE (page 1307)

Sesame Company purchased a computer system for \(74,000 on January 1, 2016. It was depreciated based on a 7-year life and an \)18,000 salvage value. On January 1, 2018, Sesame revised these estimates to a total useful life of 4 years and a salvage value of $10,000. Prepare Sesame’s entry to record 2018 depreciation expense. Sesame uses straight-line depreciation.

Short Answer

Expert verified

Depreciation expense is debited, and accumulated depreciation is credited by $40,000. The new depreciation expense is $40,000.

Step by step solution

01

Calculation of depreciation expense

Depreciationexpenseperyear=Cost-Salvagevalueestimatedlife=74,000-18,0007=$8,000Newdepreciationexpense=Bookvalue-SalvagevalueEstimatedlife=74,000-(3×8,000)-10,0004-3=$40,000

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

Depreciation Expense

$40,000

Accumulated depreciation

$40,000

(Being depreciation expense recorded)

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Most popular questions from this chapter

(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.

1. Depreciation of equipment for 2017 was overstated \(17,000.

2. Depreciation of equipment for 2018 was understated \)38,500.

3. December 31, 2017, inventory was understated \(50,000.

4. December 31, 2018, inventory was overstated \)16,200.

Instructions

Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)

How should consolidated financial statements be reported this year when statements of individual companies were presented last year?

Pam Erickson Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows. Pretax Income from: Percentage-of-Completion Completed-Contract Difference 2017 \(780,000 \)590,000 $190,000 2018 700,000 480,000 220,000 Instructions (a) Assuming that the tax rate is 35%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

(Error Analysis) When the records of Debra Hanson Corporation were reviewed at the close of 2018, the following errors were discovered. For each item, indicate by a check mark in the appropriate column whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.

2017 2018 Over- Under- No Over- Under- No Item statement statement Effect statement statement Effect

1. Failure to record amortization of patent in 2018.

2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.

3. Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.

4. Failure to record accrued interest on notes payable in 2017; that amount was recorded when paid in 2018.

5. Failure to reflect supplies on hand on the balance sheet at end of 2017.

You have been assigned to examine the financial statements of Zarle Company for the year ended December 31, 2017. You discover the following situations.

1. Depreciation of \(3,200 for 2017 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing \)19,000 that had been temporarily stored in a public warehouse. Zarle uses a periodic inventory system.

3. A collection of \(5,600 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018.

4. In 2017, the company sold for \)3,700 fully depreciated equipment that originally cost \(25,000. The company credited the proceeds from the sale to the Equipment account.

5. During November 2017, a competitor company filed a patent-infringement suit against Zarle claiming damages of \)220,000. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is \(125,000. The company has not reflected or disclosed this situation in the financial statements.

6. Zarle has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows. Cost Fair Value December 31, 2016 \)95,000 \(95,000 December 31, 2017 \)84,000 \(82,000

7. At December 31, 2017, an analysis of payroll information shows accrued salaries of \)12,200. The Salaries and Wages Payable account had a balance of \(16,000 at December 31, 2017, which was unchanged from its balance at December 31, 2016.

8. A large piece of equipment was purchased on January 3, 2017, for \)40,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Zarle normally uses the straight-line depreciation method for this type of equipment.

9. A \(12,000 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense.

10. A trademark was acquired at the beginning of 2016 for \)50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.

Instructions

Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.)
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