Question

Holtzman Company is in the process of preparing its financial statements for 2017. Assume that no entries for depreciation have been recorded in 2017. The following information related to depreciation of fixed assets is provided to you.

1. Holtzman purchased equipment on January 2, 2014, for \(85,000. At that time, the equipment had an estimated useful life of 10 years with a \)5,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2017, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a \(3,000 salvage value.

2. During 2017, 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 salvage value of \(30,000. The following computations present depreciation on both bases for 2015 and 2016. 2016 2015 Straight-line \)27,000 \(27,000 Declining-balance 48,000 60,000

3. Holtzman purchased a machine on July 1, 2015, at a cost of \)120,000. The machine has a salvage value of \(16,000 and a useful life of 8 years. Holtzman’s bookkeeper recorded straight-line depreciation in 2015 and 2016 but failed to consider the salvage value.

Instructions (a) Prepare the journal entries to record depreciation expense for 2017 and correct any errors made to date related to the information provided. (Ignore taxes.)

(b) Show comparative net income for 2016 and 2017. Income before depreciation expense was \)300,000 in 2017, and was $310,000 in 2016. (Ignore taxes.)

Short answer

The depreciation expense for part 1 is $14,500, for part 2 is $20,250, and for part 3 is $13,000.

Step-by-step solution

Journal entry for part 1

Cost of equipment	85,000
Less: Residual Value	5,000
Depreciable value of equipment	80,000
Annual depreciation	8,000
Book Value as of Jan 2020 (85,000-3*8,000)	61,000
Less: Revised Residual Value	3,000
Revised Depreciable Value of equipment	58,000
Remaining Years	4
Depreciation	14,500

Date	Particulars	Debit ($)	Credit ($)
	Depreciation Expense,	14,500
	Accumulated Depreciation		14,500
	(Being depreciation expense recorded)

Journal entry for part 2

Cost of equipment	300,000
Less: Depreciation as per DDB for 2 years	108,000
Book Value as of Jan 2020	192,000
Less:Residual Value	30,000
Depreciable value of equipment	162,000
Remaining Years	8
Depreciation for 2017	20,250

Date	Particulars	Debit ($)	Credit ($)
	Depreciation Expense,	20,250
	Accumulated Depreciation		20,250
	(Being depreciation expense recorded)

Journal entry for part 3

Cost of machine	120,000
Less: Residual Value	16,000
Book value as ofJan 2017	104,000
Depreciation wrongly charged	15,000
Correct Depreciation	13,000

Date	Particulars	Debit ($)	Credit ($)
	Accumulated Depreciation	2,000
	Depreciation Expense		2,000
	(Being correction of depreciation expense recorded)

Comparative Net Income for 2016 and 2017

	2017 ($)	2016 ($)
Income before depreciation expense	300,000	310,000
Less: Depreciation expense	13,000	13,000
Income after depreciation	287,000	297,000