Accounting Change and Error Analysis
Response to the following problem:
On December 31, 2014, 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, 2011. 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 2014, 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, 2010. 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 2014, 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, 2010. The asset's original cost was $160,000, and this amount was entirely expensed in 2010. 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 2014 before depreciation expense amounted to $400,000.
2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2014.
3. Income in 2013 was reported at $370,000.
4. Ignore all income tax effects. 5. 100,000 shares of common stock were outstanding in 2013 and 2014. Instructions
(a) Prepare all necessary entries in 2014 to record these determinations.
(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2013 and 2014. The company had retained earnings of $200,000 at December 31, 2012.