Question

Problem 22-1

Holtzman Company is in the process of preparing its financial statements for 2014. Assume that no entries for depreciation have been recorded in 2014. The following information related to depreciation of fixed assets is provided to you.

1.		Holtzman purchased equipment on January 2, 2011, for $77,100. At that time, the equipment had an estimated useful life of 10 years with a $4,100 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2014, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $2,800 salvage value.
2.		During 2014, Holtzman changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $600,000. It had a useful life of 10 years and a salvage value of $21,000. The following computations present depreciation on both bases for 2012 and 2013.

		2013		2012
Straight-line		$57,900		$57,900
Declining-balance		96,000		120,000

3.

Holtzman purchased a machine on July 1, 2012, at a cost of $120,000. The machine has a salvage value of $20,000 and a useful life of 8 years. Holtzman’s bookkeeper recorded straight-line depreciation in 2012 and 2013 but failed to consider the salvage value.

A)Prepare the journal entries to record depreciation expense for 2014 and correct any errors made to date related to the information provided. (Ignore taxes.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

B) Show comparative net income for 2013 and 2014. Income before depreciation expense was $260,185 in 2014, and was $315,958 in 2013. (Ignore taxes.)

Answer 1

1	Statement showing Depreciation
		2011	2012	2013	2014
	Cost	$77,100	$77,100	$77,100	$77,100
	Less:Salvage Value	$4,100	$4,100	$4,100	$2,800
	Depreicable cost	$73,000	$73,000	$73,000	$73,000
	Annual Depreciation	$7,300	$7,300	$7,300	$13,300(See workings below)
	After 3 years the revised useful life is 4 years and salvage value is $2,800
	BV at the end of 3 years	$55,200
	($77,100-7,300*3)
	Less:Salvage value	$2,000
	Depreciable cost	$53,200
	Revised Annual Depreciation	$13,300
	($53,200 / 4years)
	Journal:
	Depreciation Expenses	$13,300
	Accumulated Depreciation		$13,300
	(Depreciation Expenses recorded for 2014)
2	After Year 2, the the balance with the double declining method is $384,000(cost of $600,000 - 96,000 -120,000)
	Now we have to calculate depreciation with straight line method for which we have to consider the salvage value
	Adjusted cost	$384,000
	Less:Salvage value	$21,000
	Depreciable cost	$45,375
	(384,000-21,000)/8 years
	Journal:
	Depreciation Expenses	$45,375
	Accumulated Depreciation		$45,375
	(Depreciation Expenses recorded for 2014)
3	incorrect Depreciation recorded	$15,000
	(120,000/8 years)
	Correct Depreciation	$12,500
	(120,000-20,000)/8 years
	Also the machine was brought in July 1,2012 so half depreciation will be charged
	Journal:
	Accumulated Depreciation	$6,250
	Depreciation expense		$6,250
	(Correct amount charged for 2012 and 2013)
	Depreciation Expenses	$12,500
	Accumulated Depreciation		$12,500
	(Depreciation Expenses recorded for 2014)
B	Total Depreciation charged
		2013	2014
	From entyry no.1	$7,300	$13,300
	From entyry no.2	$96,000	$45,375
	From entyry no.3	(6,250)	$12,500
	Total	$97,050	$71,175
	Net Income before depreciation	$315,958	$260,185
	Less:Depreciation expenses	$97,050	$71,175
	Net Income after depreciation	$218,908	$189,010