P$22-2($LO$1,2,3)$ Change in Estimate and Error Correction

Holtzman Company is in the process of preparing its financial statements for $2020.$ Assume that no entries for depreciation have been recorded in $2020.$ The equipment is depreciated on a straight$-$line basis. The following information related to depreciation of fixed assets is provided to you.

$1.$ Holtzman purchased equipment on January $2,2017.$

Cost of equipment $$89,100$

Estimated useful life in years $10$

Estimated salvage value $$5,100$

On January $2,2020,$ as a result of additional information, the company changed the estimate of the remaining useful life and salvage value.

New estimated remaining useful life in years $4$

New estimated salvage value $$2,800$

$2.$ During $2020,$ Holtzman changed from the double$-$declining balance method for its building to the straight$-$line method.

Original cost of building $$310,000$

Original useful life in years $10$

Original salvage value $$31,000$

The following computations present depreciation on both bases for $2018$ and $2019.$

$20192018$

Straight$-$line $$27,900$ $$27,900$

Declining$-$balance $49,60062,000$

$3.$ Holtzman purchased a machine on July $1,2018.$ Holtzman$$s bookkeeper recorded straight$-$line depreciation in $2018$ and $2019$ but failed to consider the salvage value.

Cost of machine $$120,000$

Estimated useful life in years $8$

Estimated salvage value $$20,000$

Instructions:

Note: Use Excel's depreciation functions to calculate depreciation.

$($a$)$ Prepare the journal entries to record depreciation expense for $2020$ and correct any errors made to date related to the information provided. $($Ignore taxes.$)$

$(1)$ Calculation of depreciation through the end of $2019$:

Year Expense

$2017$

$2018$

$2019$

Total

Calculation of book value at the beginning of $2020$:

Cost of Equipment

Less: Depreciation prior to $2020$

Book Value $($January $1,2020)$

Depreciation during $2020$

Debit Credit

$2020$

$(2)$ Cost of Building

Less: Depreciation prior to $2020$

$2018$

$2019$

Book Value, January $1,2020$

Depreciation during $2020$

Debit Credit

$2020$

$(3)$ Depreciation expense for $2020$:

Debit Credit

$2020$

Correction of depreciation error:

$2020$

Calculation of depreciation correction: $20182019$

Depreciation recorded

Depreciation that should be recorded

Excess Depreciation recorded

$($b$)$ Show comparative net income for $2019$ and $2020.$ Income before depreciation expense follows. $($Ignore taxes.$)$

$2019$

$2020$

Calculation of depreciation expense:

$20202019$

Equipment

Building

Machinery

Total

HOLTZMAN COMPANY

Comparative Income Statements

For the Years $2020$ and $2019$

$20202019$

Income before depreciation expense

Depreciation expense

Net Income