Al\'s Sporting Goods purchased store fixtures on January 1,2014,at a cost of $18

Question

Al's Sporting Goods purchased store fixtures on January 1,2014,at a cost of $180,000. The anticipated service life was ten years, with no residual value. Al's has been using the double-declining balance method,but in 2016 adopted the straight-line method because the company believes it is a better meausure of income. Al's has a December 31 year-end. Ignoring income taxes,the journal entry to record the adoption of the new method of depreciation and the 2016 depreciation under the new method is (assuming no entry for depreciation has been made for 2016 yet): On January 1,2014, Pine purchased an asset that had an estimated salvage value of $700 after the estimated useful life of 4 years. Pine uses the sum-of-years-digit depreciation method and recorded $1,560 of depreciation expense in 2016. What was the original cost of the asset? The following expenditures relating to a factory building were made by East Company during the year ended 12/31/16: Replacement of all the old doors with new fireproof doors $75,000 Cleaned the factory building and lubricated the Machinery $25,000 Major improvements to the plumbing system $35,000 How much should be capitalized in 2016?

Explanation / Answer

Stores Fixtures:

The double declining balance depreciation method is an accelerated depreciation method that counts twice as much of the asset’s book value each year as an expense compared to straight-line depreciation.

Depreciation as per straight line method is for 10 years i.e., 10%

Depreciation as per double diclining balance model = 2x10% = 20%

Balance of stores fixtures on Jan 1,2016 = $180,000x80%x80% = $ 115,200

As per IAS 16, in case of change in the method of depreciation, depreciation should be charged prospectively over the remaining useful life of the asset

The change in method of depreciation has to be reflected in the disclosure.

Remaining life of the asset = 8years

Journal entry

Depreciation($115,200/8) Dr $ 14,400

To Store fixtures $ 14,400

Sum of years digits method:

This method takes the asset's expected life and adds together the digits for each year. So if the asset was expected to last for four years, the sum of the years' digits would be obtained by adding: 4 + 3 + 2 + 1 to get a total of 10. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year 1.

Let Cost of the asset be 'X'

Depreciation in 2016, year 3 = 2 x (X-700)/10

1560 = 2 x (X-700)/10

X = $ 8,500

Expenses to factory Building:

IAS 16 states that items of property, plant, and equipment should be recognised as assets when it is probable that:

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

Only lubricating the machinery is only satisfying the above criteria as it improves the efficiency of the machinary.

$25,000 should be capitalised in 2016.

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