(Accounting Changes—Depreciation) Hearts Inc. acquired the following assets in J
ID: 2476553 • Letter: #
Question
(Accounting Changes—Depreciation) Hearts Inc. acquired the following assets in January 2012. Equipment, estimated service life, 5 years; no salvage value $650,000 Building, estimated service life, 40 years; salvage value, $500,000 $5,500,000 The equipment has been depreciated using the double-declining balance method for the first 2 years for financial reporting purposes. In 2014, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 40 years to 35 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method. Instructions (a) Prepare the general journal entry to record depreciation expense for the equipment in 2014. (b) Prepare the journal entry to record depreciation expense for the building in 2014.
Explanation / Answer
Depreciable amount of asset = Cost - Salvage value = $ 650,000 - 0 = $ 650,000
Since the expected life of the equipment is 5 years, the double declining rate of depreciation = 100/ 5 x 2 = 40%
Depreciation already charged for the first two years under double declining balance method = 650,000 x 40% + 650,000 x 60% x 40% = $ 416,000
Under the straight-line method, depreciation for first two years for the equipment would have been $ 650,000 / 5 x 2 = 260,000
Total depreciation to be provided under straight-line method till December 31, 2014 = $ 130,000 x 3 = $ 390,000
Excess depreciation expense = $ 416,000 - $ 390,000 = $ 26,000
Depreciation on Building:
Depreciation under straight line method for 2012 and 2013 = $ ( 5,500,000 - 500,000) / 40 x 2 = $ 250,000
Book value on January 1, 2014 = $ 5,500,000 - $ 250,000 = $ 5,250,000
The estimated useful life gets changed from 40 years to 35 years. Two years have already gone by. Hence remaining estimated useful life is 33 years.
Therefore, prospective annual depreciation on building = $ ( 5,250,000 - 500,000) / 33 = $ 143,939
Date Account Titles Debit Credit $ $ December 31, 2014 Accumulated depreciation-equipment 26,000 Retained earnings 26,000 Excess depreciation on equipment written back Depreciation expense 143,939* To accumulated depreciation -building 143,939 To record depreciation expense on buildingRelated Questions
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