P21.1 (LO 2, 3) Groupwork (Change in Estimate and Error Correction) Holtzman Company is in the process of preparing its financial statements for 2025. Assume that no entries for depreciation have been recorded in 2025. The following information related to depreciation of fixed assets is provided to you.

1. Holtzman purchased equipment on January 2, 2022, 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, 2025, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $3,000 residual value.

2. During 2025, 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 computations present depreciation on both bases for 2023 and 2024.

2024 2023 Straight-line

$27,000 $27,000 Declining-balance 48,000 60,000 3. Holtzman purchased a machine on July 1, 2023, at a cost of $120,000. The machine has a residual value of $16,000 and a useful life of 8 years. Holtzman’s bookkeeper recorded straight-line depreciation in 2023 and 2024 but failed to consider the residual value.

Instructions

a. Prepare the journal entries to record depreciation expense for 2025 and correct any errors made to date related to the information provided.

b. Show comparative net income for 2024 and 2025. Income before depreciation expense was $300,000 in 2025, and was $310,000 in 2024. (Ignore taxes.)