As at December 31, 2011, Oatfield Corporation is having its financial statements audited for the first time ever.
The auditor has found the following items that might have an effect on previous years.
1. Oatfield purchased equipment on January 2, 2008, for $130,000. At that time, the equipment had an estimated useful life of 10 years, with a $10,000 residual value. The equipment is depreciated on a straight-line basis. On January 2, 2011, as a result of additional information, the company determined that the equipment had a total useful life of seven years with a $6,000 residual value.
2. During 2011, Oatfield changed from the double-declining-balance method for its building to the straight-line method because the company thinks the straight-line method now more closely follows the benefits received from using the assets. The current year depreciation was correctly calculated using the new method following straight-line depreciation. In case the following information was needed, the auditor provided calculations that present depreciation on both bases. The building had originally cost $1.2 million when purchased at the beginning of 2009 and has a residual value of $120,000. It is depreciated over 20 years. The original estimates of useful life and residual value are still accurate.
3. Oatfield purchased a machine on July 1, 2008, at a cost of $160,000. The machine has a residual value of $16,000 and a useful life of eight years. Oatfield’s bookkeeper recorded straight-line depreciation during each year but failed to consider the residual value.
4. Prior to 2011, staff training costs were expensed immediately because they were immaterial, even though the company would benefit for at least three years because of improved worker efficiency. With the spurt in growth, these costs have now become material and management has decided to depreciate them over three years. Amounts expensed in 2008, 2009, and 2010 were $300, $500, and $1,000, respectively. During 2011, $4,500 was spent and the amount was debited to Deferred Training Costs (an asset account).
Answer the following, ignoring income tax considerations.
(a) Prepare the necessary journal entries to record each of the changes or errors. The books for 2011 have not been closed.
(b) Calculate the 2011 depreciation expense on the equipment.
(c) Calculate the comparative net incomes for 2010 and 2011, starting with income before the effects of any of the changes identified above. Income before depreciation expense was $600,000 in 2011 and $420,000 in 2010.

  • CreatedAugust 23, 2015
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