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Chapter 22: Q18Q. (page 1306)

In January 2017, installation costs of \(6,000 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of \)30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entry(ies) should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018.

Short Answer

Expert verified

The depreciation expense is $1,620, and the entries for depreciation and the correction of error are recorded.

Step by step solution

01

Calculation of depreciation

Book value (30,000-3,000) +(6,000-600)

32,400

Useful life

20 years

Depreciation expense (32400/20)

1,620

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

Dec 31

Machinery

6,000

Retained earnings (6000/10) *9

5,400

Accumulated depreciation

600

(being the correction of an error recorded)

Dec 31

Depreciation expense

1,620

Accumulated depreciation

1,620

(being depreciation expense recorded)

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Most popular questions from this chapter

Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2016. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2017. The FIFO income statement is computed in accordance with the requirements of GAAP. Kenseth’s profit-sharing agreement with its employees indicates that the company will pay employees 10% of income before profit-sharing. Income taxes are ignored. LIFO Basis FIFO Basis 2017 2016 2017 2016 Sales \(3,000 \)3,000 \(3,000 \)3,000 Cost of goods sold 1,130 1,000 1,100 940 Operating expenses 1,000 1,000 1,000 1,000 Income before profi t-sharing 870 1,000 900 1,060 Profi t-sharing expense 87 100 96 100 Net income \( 783 \) 900 \( 804 \) 960 Instructions Answer the following questions. (a) If comparative income statements are prepared, what net income should Kenseth report in 2016 and 2017? (b) Explain why, under the FIFO basis, Kenseth reports \(100 in 2016 and \)96 in 2017 for its profit-sharing expense. (c) Assume that Kenseth has a beginning balance of retained earnings at January 1, 2017, of \(900 using the LIFO method. The company declared and paid dividends of \)500 in 2017. Prepare the -retained earnings statement for 2017, assuming that Kenseth has switched to the FIFO method.

Under IFRS, the retrospective approach should not be used if:

(a) retrospective application requires assumptions about management’s intent in a prior period.

(b) the company does not have trained staff to perform the analysis.

(c) the effects of the change have counterbalanced.

(d) the effects of the change have not counterbalanced.

Question: (Analysis of Various Accounting Changes and Errors) Mathys Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Consequently, she has proposed the following accounting changes in connection with Mathys Inc.’s 2017 financial statements.

1. At December 31, 2016, the client had a receivable of \(820,000 from Hendricks Inc. on its balance sheet. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item.

2. The client proposes the following changes in depreciation policies.

(a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2016, would have been \)250,000 less. The effect of the change on 2017 income alone is a reduction of \(60,000.

(b) For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years’-digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2017. If straight-line depreciation were used, 2017 income would be \)110,000 greater.

3. In preparing its 2016 statements, one of the client’s bookkeepers overstated ending inventory by \(235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment.

4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If the new accounting method had been used prior to 2017, retained earnings at December 31, 2016, would have been \)375,000 less.

5. For the nursery division, the client proposes to switch from FIFO to LIFO inventories because it believes that LIFO will provide a better matching of current costs with revenues. The effect of making this change on 2017 earnings will be an increase of \(320,000. The client says that the effect of the change on December 31, 2016, retained earnings cannot be determined.

6. To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the completed-contract method of accounting to the percentage-of-completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2016, would have been \)1,075,000 greater.

Instructions

(a) For each of the changes described above, decide whether:

(1) The change involves an accounting principle, accounting estimate, or correction of an error.

(2) Restatement of opening retained earnings is required.

(b) What would be the proper adjustment to the December 31, 2016, retained earnings?

Oliver Corporation has owned stock of Conrad Corporation since 2014. At December 31, 2017, its balances related to this investment were:

Equity Investments \(185,000

Fair Value Adjustment (AFS) 34,000 Dr.

Accumulated Unrealized Holding Gain or Loss—Income (recorded in Retained Earnings) 34,000 Cr.

On January 1, 2018, Oliver purchased additional stock of Conrad Company for \)475,000 and now has significant influence over Conrad. If the equity method had been used in 2014–2017, Oliver’s share of income would have been $33,000 greater than dividends received. Prepare Oliver’s journal entries to record the purchase of the investment and the change to the equity method.

How might differences in presentation of comparative data under GAAP and IFRS affect adoption of IFRS by U.S. companies?

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