Wardell Company purchased a mini computer on January 1, 2011, at a cost of $40,0
ID: 2489733 • Letter: W
Question
Wardell Company purchased a mini computer on January 1, 2011, at a cost of $40,000. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,000. On January 1, 2013, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900.
Prepare the appropriate adjusting entry for depreciation in 2013 to reflect the revised estimate.
Prepare the appropriate adjusting entry for depreciation in 2013 to reflect the revised estimate. Assuming that the company uses the sum-of-the-years'-digits method instead of the straight-line method.
Wardell Company purchased a mini computer on January 1, 2011, at a cost of $40,000. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,000. On January 1, 2013, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900.
Explanation / Answer
1./
DEPRECIATION USING ORIGINAL ESTIMATES
= ($40000 - $4000) / 5
= $7200/YEAR
BOOK VALUE IN 2013
= [$40000 – (2 * $7200)]
= $25600
NEW RESIDUAL VALUE
= $900
REMAINING USEFUL LIFE IN 2013, WITH CHANGE = 8 YEARS (10 – 2)
DEPRECIATION = ($25600 – 900) / 8
= $3087.50
JOURNAL ENTRY
DEPERICATION EXPENSES A/C.................................DR $3087.50
TO ACCUMULATED DEPERICATION $3087.50
2./
SUM-OF-THE-YEARS’-DIGITS METHOD
= (COST – RESIDUAL VALUE) * (DECLINING YEARS / SUM OF THE YEARS)
SUM OF THE YEARS
= [N * (N +1)] / 2
= [5 * (5 + 1) ] / 2
= 15
2011= ($40000 - $4000) * (5 / 15)
= 12000
2012= ($40000 - $4000) * (4 / 15)
= 9600
BOOK VALUE IN 2013
= [$40000 – (12000 + 9600)]
= $18400
REMAINING LIFE IN 2013
= 8 YEARS (10 – 2)
SUM OF THE YEARS
= [8 * (8 + 1) / 2]
= 36
DEPRECIATION IN 2013
= ($18400 - $900) * (8 / 36)
= $3889
DEPERICATION EXPENSES A/C.................................DR $3889
TO ACCUMULATED DEPERICATION $3889
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