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Brueggen Company: change in estimate and error correction

(Change in Estimate and Error Correction) Brueggen Company is in the process of preparing its financial statements for 2007. Assume that no entries for depreciation have been recorded in 2007.

The following information related to depreciation of fixed assets is provided to you:

Brueggen purchased equipment on January 2, 2004, for $65,000. 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, 2007, 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.

During 2007 Brueggen 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 2005 and 2006.

2006 2005
Straight-line
$27,000
$27,000

Declining-balance
48,000
60,000

Brueggen purchased a machine on July 1, 2005, at a cost of $80,000. The machine has a salvage value of $8,000 and a useful life of 8 years.Brueggen's bookkeeper recorded straight-line depreciation in 2005 and 2006 but failed to consider the salvage value.

Instructions
Prepare the journal entries to record depreciation expense for 2007 and correct any errors made to date related to the information provided.
Round all computations to two decimal places.)
Show comparative net income for 2006 and 2007. Income before depreciation expense was $300,000 in 2007, and was $310,000 in 2006. Ignore taxes.

Solution Preview

Prepare the journal entries to record depreciation expense for 2007 and correct any errors made to date related to the information provided. (Round all computations to two decimal places.)

First journal entry for the equipment depreciation:
For the period 2004 to 2006, the equipment was depreciated on staright line basis assuming a useful life of 10 year. Thus depreciation already accounted for in this period is calculated as below:

Cost of equipment=$65,000
Salvage value=$5,000
Useful Life=10
Depreciation per year = (65000-5000)10=$6000 every year
Depreciation in year 2004 =$6,000
Depreciation in year 2005 =$6,000
Depreciation in year 2005 =$6,000
Total depreciation till ...

Solution Summary

The solution examines the change in estimation and error correction for Brueggen Company.

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