Machinery purchased for $ 104,400 by Tom Brady Co. in 2010 was originally estima

Question

Machinery purchased for $ 104,400 by Tom Brady Co. in 2010 was originally estimated to have a life of 8 years with a salvage value of $ 6,960 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2015, it is determined that the total estimated life should be 10 years with a salvage value of $7,830 at the end of that time. Assume straight-line depreciation. Prepare the entry to correct the prior year's depreciation, if necessary. (If no entry is requiredselect "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Prepare the entry to record depreciation for 2015. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Use Machinery related account.)

Explanation / Answer

Whenever useful life of an asset changes, it changes from prospective period not retrospect. There is no need to adjust previously reported statement and opening balances.

In Straight line method, depreciation charge equally throughout the year.

Depreciation                =           Original Value – Salvage Value

                                                  --------------------------------------------

                                                            No. of years

                                     =     104400     -     6960

                                         ---------------------------

                                                        8

                                    = $ 12180

Accumulated Depreciation for 5 years    = 12180 *5          =   $ 60900

Value after 5 years             = 104400-60900    = $ 43500

Depreciation dr                       12180

     Accumulated Depreciation                                12180

(being depreciation charged)

Change in depreciation from revision of useful life

(Historical Cost - Accumulated Depreciation) – Salvage Value

                                    Remaining useful life

= ( 104400 – 60900 ) -   7830

    ----------------------------------------

                       5

= $ 7134

Depreciation dr                         7134

     Accumulated Depreciation                             7134

(being depreciation charged)

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