Change in Estimate and Error Correction
Response to the following problem:
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 $85,000. 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, 2014, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $3,000 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 $300,000. It had a useful life of 10 years and a salvage value of $30,000.
The following computations present depreciation on both bases for 2012 and 2013.
2013 2012
Straight-line $27,000 $27,000
Declining-balance 48,000 60,000
3. Holtzman purchased a machine on July 1, 2012, at a cost of $120,000. The machine has a salvage value of $16,000 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.
Instructions
(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.)
(b) Show comparative net income for 2013 and 2014. Income before depreciation expense was $300,000 in 2014, and was $310,000 in 2013. (Ignore taxes.)