On January 1, 2008, Mead Company purchased a building and machinery that have th
ID: 2452668 • Letter: O
Question
On January 1, 2008, Mead Company purchased a building and machinery that have the following useful lives, salvage value, and costs. Building, 25-year estimated useful life, $5,000,000 cost, $500,000 salvage value Machinery, 10-year estimated useful life, $700,000 cost, no salvage value The building has been depreciated under the straight-line method through 2014. In 2015, the company decided to switch to the double-declining balance method of depreciation for the building. Mead also decided to change the total useful life of the machinery to 8 years, with a salvage value of $35,000 at the end of that time. The machinery is depreciated using the straight-line method. Prepare the journal entry necessary to record the depreciation expense on the building in 2015. Compute depreciation expense on the machinery for 2015.Explanation / Answer
a) Depreciation expense on Building:
The building has been depreciated under the SLM method:
Original Cost = $ 5,000,000
Depreciation for
7 years upto 2014 = 1,260,000 (180,000*7)
WDV on 31, Dec,2014 = 3,740,000
Had the firm followed the DDB method, the rate would have been 4%.
The depreciation provided would have been:
Value
Depn
Balance
Year 1
5000000
200000
4800000
2
4800000
192000
4608000
3
4608000
184320
4423680
4
4423680
176947
4246733
5
4246733
169869
4076863
6
4076863
163075
3913789
7
3913789
156552
3757237
1242763
The total depreciation provided has been higher under the SLM
For this the following entry has to be passéd, to withdraw the excess depreciation and to increase the WDV to that of the DDB method as at the end of the year 2014:
Accumulated Depreciation (Machinery) Dr 17,237
Retained Earnings Account Cr 17,237
Further, for the year 2015 the depreciation expense has to be accounted @ 4% on 3757237 = 150289
The entry would be
Depreciation Expense Dr 150,289
Accumulated depreciation (Machinery) Cr 150,289
b) Depreciation on machinery:
Original cost on 1, Jan, 2008 = $ 700,000
Less: Depn till 31 Dec, 2014 = 490,000 (70000*7)
Written Down Value as on = 210,000
31 Dec, 2014
When the life and the salvage value are revised the annual depreciaton is to be changed prospectively
as below:
Depreciation expense per year = (Cost – Revised Residual Value – Accumulated Depreciation)
Revised remaining no of years of useful life
=(700000-35000-490000)/(8-7) = 175,000 $ per year for one year.
Hence, Depreciation on machinery for 2015 = $ 175,000
Value
Depn
Balance
Year 1
5000000
200000
4800000
2
4800000
192000
4608000
3
4608000
184320
4423680
4
4423680
176947
4246733
5
4246733
169869
4076863
6
4076863
163075
3913789
7
3913789
156552
3757237
1242763
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