Annual deprecation expense on a building purchased a few years ago (using the st

Question

Annual deprecation expense on a building purchased a few years ago (using the straight-tine method) is $5,000. The cost of the building was $100,000. The current book value of the equipment (January 1, 2013) is $85,000. At the time of purchase, the asset was estimated to have a zero salvage value. On January 1, 2013, the company decided to reduce the original useful life by 25% and to establish a salvage value of $5,000. The firm also decided doubie-declining-balance depreciation was more appropriate. Ignore tax effects. Assume a 20 percent tax rate. Required: Prepare the appropriate adjusting entry to record switching is any. if there is no journal entry, write no journal required. Record the annual depreciation for 2013.

Explanation / Answer

the annual depreciation of the asset is $5000 and the present value on Jan 1, 2013 is $85000. The cost of the building was $100000. So, the building was purchased [100000 - 85000 = 15000/5000] 3 years back in 2010. The life of the asset is taken as 20 years which is now taken as 15 years with $5000 salvage value.

the straight line depreciation rate comes = 100000 - 5000 / 15 = 6333 or 6.33% or Double declining balance depreciation rate 12.67%.

Now, we calculate the depreciation on the Double declining balance depreciation rate 12.67% since 2010:

So, the revised depreciation for the first 3 years of operation = 12670+11065+9663 = $33398

the adjusting journal entry to record the switching is

Debit Accumulated Depreciation - Building $15,000

Debit Depreciation (prior period) $18398

Credit Accumulated Depreciation - Building (revised) $33,398

Depreciation entry for 2013 is:

Debit Depreciation Expense $8439

Credut Accumulated Depreciation - Building (revised) $8439

2010 100000 * 12.67% = 12670 87330 2011 87330 * 12.67% = 11065 76265 2012 76265 * 12.67% = 9663 66602 2013 66602 * 12.67% = 8439

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