Question

Gerald Englehart Industries changed from the double-declining-balance to the straight-line method in 2018 on all its equipment. There was no change in the assets’ salvage values or useful lives. Plant assets, acquired on January 2, 2015, had an original cost of \(1,600,000, with a \)100,000 salvage value and an 8-year estimated useful life. Income before depreciation expense was \(270,000 in 2017 and \)300,000 in 2018.

Instructions (a) Prepare the journal entry(ies) to record depreciation expense in 2018.

(b) Starting with income before depreciation expense, prepare the remaining portion of the income statement for 2017 and 2018.

Short answer

Depreciation is debited, and accumulated depreciation is credited by $115,000 to record the depreciation of 2018. The net income in 2017 is $45,000 and in 2018 is $185,000.

Step-by-step solution

Journal entry for Part A

$$\begin{gathered} \mathbf{Bookvalue}\mathbf{=}\mathbf{Cost}\mathbf{\times }\mathbf{(}\mathbf{1}\mathbf{-}\mathbf{DDRate}{\mathbf{)}}^{\mathbf{N}} \\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{(}\mathbf{1}\mathbf{-}\mathbf{0}\mathbf{.}\mathbf{25}{\mathbf{)}}^{\mathbf{3}} \\ \mathbf{=}\mathbf{\$}\mathbf{675}\mathbf{,}\mathbf{000} \\ \mathbf{Depreciation}\mathbf{}\mathbf{expense}\mathbf{}\mathbf{SLM}\mathbf{=}\frac{\mathbf{Bookvalue}\mathbf{-}\mathbf{Salvagevalue}}{\mathbf{Remaining}\mathbf{}\mathbf{useful}\mathbf{}\mathbf{life}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{675}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{100}\mathbf{,}\mathbf{000}}{\mathbf{5}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{115}\mathbf{,}\mathbf{000} \end{gathered}$$

Date	Particulars	Debit ($)	Credit ($)
	Depreciation expense	115,000
	Accumulated Depreciation		115,000
	(Being depreciation expenses recorded)

Extract of income Statement

	2017 ($)	2018 ($)
Income Before depreciation	270,000	300,000
Less: Depreciation	-225,000	-115,000
Net Income	45,000	185,000