Makins
Ltd. purchased a machine on January 1, 2009, for $1,350,000. At that time, it
was estimated that the machine would have a 10-year life and no residual value.
On December 31, 2012, the firm’s accountant found that the entry for
depreciation expense had been omitted in 2010. In addition, management informed
the accountant that it planned to switch to double-declining-balance
depreciation because of a change in the pattern of benefits received, starting
with the year 2012. At present, the company uses the straight-line method for depreciating
equipment.
Instructions
(a)
Prepare the general journal entries, if any, the accountant should make at
December 31, 2012. (Ignore tax effects.)
(b)
Assume the same information as above, but factor in tax effects. The company
has a 34% tax rate for 2009 to 2012.
(a)
December 31, 2012
Retained Earnings......................... 135,000
Accumulated
Depreciation—Machinery.... 135,000
(To correct for the omission of depreciation
expense in 2010)
($1,350,000
/ 10 years = $135,000 depreciation per year)
No extra entry is necessary to record the change from
one depreciation method to another since changes from one depreciation method
to another is now definitely a change in estimate, not a change in accounting
policy. Changes in estimates are treated prospectively.
The adjusting entry to be made for depreciation,
based on a prospective application of DDB is:
Depreciation Expense...................... 270,000
Accumulated
Depreciation.............. 270,000
DDB rate: (100% ÷ 7 years remaining) X 2 = 28.5714%
$1,350,000 – (3 X $1,350,000) = $945,000
$945,000 X .285714 = $270,000
(b)
December 31, 2012
Retained Earnings......................... 89,100
Future Income Tax Asset ($135,000 X 34%).. 45,900
Accumulated
Depreciation—Machinery.... 135,000
(To correct for the omission of depreciation
expense in 2010)
As above (see part a), with the same depreciation
entry.
