Problem: (Change in Estimate, Principle, and Error Correction) Brueggen Company is in the process of having its financial statements audited for the first time as of December 31, 2004. The auditor has found the following items that occurred in previous years:
Q1. Brueggen purchased equipment on January 2, 2001, for $65,000. At that time, the equipment had an estimated useful life of 10 years with a $5,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2004, as a result of additional information, the company determined that the equipment had a total estimated useful life of 7 years with a $3,000 salvage value.
Q2. During 2004 Brueggen changed from the double-declining balance method for its building to the straight-line method. The auditor provided the following computations which present depreciation on both bases.
2004 2003 2002
Straight-line $27,000 $27,000 $27,000
Declining-balance 48,600 54,000 60,000
Q3. Brueggen purchased a machine on July 1, 2002, at a cost of $80,000. The machine has a salvage value of $8,000 and a useful life of 8 years. Brueggen’s bookkeeper recorded straight-line depreciation during each year but failed to consider the salvage value.
Instructions:
(a) Prepare the necessary journal entries to record each of the preceding changes or errors. The books for 2004 have not been closed.
(b) Compute the 2004 depreciation expense on the equipment.
(c) Show the comparative statements for 2003 and 2004, starting with income before the cumulative effect of change in accounting principle. Income before depreciation expense was $300,000 in 2004, and net income was $210,000 in 2003.