Question

On December 31, 2017, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three pieces of equipment.

1. Equipment A was purchased January 2, 2014. It originally cost \(540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2017, the decision was made to change the depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to useful life and salvage value remained unchanged.

2. Equipment B was purchased January 3, 2013. It originally cost \)180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero residual value. In 2017, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at \(3,000.

3. Equipment C was purchased January 5, 2013. The asset’s original cost was \)160,000, and this amount was entirely expensed in 2013. This particular asset has a 10-year useful life and no residual value. The straight-line method was chosen for depreciation purposes.

Additional data:

1. Income in 2017 before depreciation expense amounted to \(400,000.

2. Depreciation expense on assets other than A, B, and C totaled \)55,000 in 2017.

3. Income in 2016 was reported at \(370,000.

4. Ignore all income tax effects.

5. 100,000 shares of common stock were outstanding in 2016 and 2017.

Instructions

(a) Prepare all necessary entries in 2017 to record these determinations.

(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2016 and 2017. The company had retained earnings of \)200,000 at December 31, 2015.

Short answer

The journal entries for 2017 are passed, and a comparative statement of retained earnings is prepared in step 2.

Step-by-step solution

Journal entries

Date	Particulars	Debit ($)	Credit ($)
	Depreciation expense- Equipment A	94,500
	Accumulated Depreciation		94,500
	(Being depreciation expense recorded)
	Depreciation Expense- Equipment B	25,800
	Accumulated Depreciation		25,800
	(Being depreciation expense recorded)
	Equipment C
	Cost of goods sold	96,000
	Retained Earnings		96,000
	(being income recorded)
	Depreciation expense	16,000
	Accumulate Depreciation		16,000
	(Being depreciation expense recorded)

Comparative retained earnings statement

	2016 ($)	2017 ($)
Opening Balance	200,000	570,000
Add: net Income	370,000	304,700
Closing balance	570,000	874,700