Buckeye Company purchased a machine on January 1, 2011. The machine had a cost o
ID: 2455977 • Letter: B
Question
Buckeye Company purchased a machine on January 1, 2011. The machine had a cost of $26,000 with a $10,000 residual value. The estimated useful life of the machine was eight years. On January 1, 2013, due to technological innovations, the estimated useful life was reduced by two years from the original life and the residual value was reduced by 50%. The company also decided to switch to the sum of the year's digits rather than the method they have used up to this point (straight-line depreciation).
A) prepare the journal entry to record the annual depreciation on December 31, 2013.
B) what would the entry be if the company continued to utilize the straight line method?
Explanation / Answer
(A) ; Depreciation Dr. $4857.14
To Machine $4857.14
(Being depreciation charged on machine as per sum of digit method)
(B) : Depreciation Dr. $2000
To Machine $2000
(Being depreciation charged on machine as per SLM { $26000 - $10000 } / 8 years )
Note:
As per Straight line method :
Depreciation upto 31 December ,2012 from 1january,2011 = $26000 - $10000 / 8 years * 2 years
= 2000 * 2 years
= $4000
Book vakue (Carrying value) on 31 December,2012 = $26000 - $4000 = $22000
As per sum of the year's digit Method :
On 1january ,2013 the estimated useful life was reduced by two years from the original life and the residual value was reduced by 50%
Book value(carrying amount) = $22000 And Now estimates life = 6 years , salvage value = $10000 - $5000 = $5000
Depreciation for 31December,2013 = (carrying amount / sum of digit)* remaining estimated life
, where sum of digit= 6+5+4+3+2+1 =21
Depreciation = 17000 / 21 * 6
= $ 4857.14
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