Holtzman Company Limited is in the process of preparing its financial statements for 2023. Assume that no entries for depreciation have been recorded in 2023. The following information related to depreciation of fixed assets is provided to you.

1. Holtzman purchased equipment on January 2, 2020, for $85,000. At that time, the equipment had an estimated useful life of 10 years with a $5,000 residual value. The equipment is depreciated on a straight-line basis. On January 2, 2023, as a result of additional information, the company determined that the equipment has a remaining useful life of four years with a $3,000 residual value.

2. During 2023, 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 residual value of $30,000. The following calculations present depreciation on both bases for 2021 and 2022.

3. Holtzman purchased a machine on July 1, 2021, at a cost of $120,000. The machine has a residual value of $16,000 and a useful life of eight years. Holtzman’s bookkeeper recorded straight-line depreciation in 2021 and 2022 but failed to consider the residual value.

Instructions

a. Prepare the journal entries to record depreciation expense for 2023 and correct any errors made to date related to the information provided. (Ignore income tax considerations.)

b. Show comparative net income for 2022 and 2023. Income before depreciation expense was $300,000 in 2023 and $310,000 in 2022. (Ignore income tax considerations.)

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2021 2022 Straight-Line $27,000 27,000 Double-Declining-Balance $60,000 48,000