Annual depreciation expense on a building purchased a few years ago (using the s

Question

Annual depreciation expense on a building purchased a few years ago (using the straight-line method) is $5,000. The cost of the building was $100,000. The current book value of the equipment (January 1, 2018) is $85,000. At the time of purchase, the asset was estimated to have a zero salvage value. On January 1, 2018, the company decided to reduce the original useful life by 25% and to establish a salvage value of $5,000. The firm also decided double-declining-balance depreciation was more appropriate. Ignore tax effects.

Required:
1. Prepare the journal entry, if any, to report the accounting change under GAAP.
2. Record the annual depreciation for 2018.

Explanation / Answer

Working Note 1 :Calculation of remaining useful life

Annual depreciation expense = $5,000

Cost of the building = $100,000

Thus original useful life = $100,000 / $5,000 = 20 years

Years already passed = ($100,000- $85,000) / $5,000 = 3 years

New estimated useful life = 20 years * 75 % = 15 years.

Therefore remaining useful life = 15 years - 3years = 12 years

Working Note 2 : Calculation of annual depreciation for 2018

Note : Change in depreciation method is a change in acounting estimate , thus the impact of the change shall prospectively applied through out the remaining useful life of the asset.

Depreciation as per double-declining-balance = $85,000 / 12 years * 2 = $14,167

Journal Entries Date Accounts Titles & Explanation Debit ($) Cebit ($) (a) To report the accounting change under GAAP - No Entry (b) Record the annual depreciation for 2018. Depreciation 14,167 Accmulated depreciation 14,167

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