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P22-6 Madrasa Inc

Price: $2.50


On December 31, 2012, before the books were closed, the
management and accountants of Madrasa Inc. made the following determinations about three depreciable assets.

1. Depreciable asset A was purchased January 2, 2009. 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 2012, 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. Depreciable asset B was purchased January 3, 2008. 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 salvage value. In 2012, the decision was made to shorten the total life of this
asset to 9 years and to estimate the salvage value at $3,000.

3. Depreciable asset C was purchased January 5, 2008. The asset’s original cost was $160,000, and this
amount was entirely expensed in 2008. This particular asset has a 10-year useful life and no salvage
value. The straight-line method was chosen for depreciation purposes.

Additional data:
1. Income in 2012 before depreciation expense amounted to $400,000.
2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2012.
3. Income in 2011 was reported at $370,000.
4. Ignore all income tax effects.
5. 100,000 shares of common stock were outstanding in 2011 and 2012.

Instructions
(a) Prepare all necessary entries in 2012 to record these determinations.
(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2011 and 2012. The company had retained earnings of $200,000 at December 31, 2010.

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