Reference no: EM132479083

Question - On December 31, 2020, 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, 2017. 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 2020, 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, 2016. 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 2020, 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, 2016. The asset's original cost was $160,000, and this amount was entirely expensed in 2016. 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 2020 before depreciation expense amounted to $400,000.

2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2020.

3. Income in 2019 was reported at $370,000.

4. Ignore all income tax effects.

5. 100,000 shares of common stock were outstanding in 2019 and 2020.

Instructions -

a. Prepare entries in 2020 to record these determinations.

b. Prepare comparative retained earnings statements for Madrasa Inc. for 2019 and 2020. The company had retained earnings of $200,000 at December 31, 2018.