Question

During 2019, Ryel Company's controller asked you to prepare correcting journal entries for the following three situations 1. Machine A was purchased for 350,000 on January 1, 2014. Straight-line depreciation has been recorded for 5 years, and the Accumulated Depreciation account has a balance of $25,000. The estimated residual value remains at $5,000, but the service life is now estimated to be 1 year longer than estimated originally 2. Machine B was purchased for $40,000 on January 1, 2017. It had an estimated residual value of $5,000 and an estimated service life of 10 years. It has been depreciated under the double-declining balance method for 2 years. Now, at the beginning of the third yeal Ryel has decided to change to the straight-line method. 3. Machine C was purchased for $20,000 on January 1, 2018. Double-declining balance depreciation has been recorded for 1 year. The estimated residual value of the machine is $2,000 and the estimated service life is 5 years. The computation of the depreciation erroneously included the estimated residual value

Answer 1

Answer

1. Change in useful life is change in Accounting estimates, so retrospective changes are not required and hence no correcting journal entry is required for prior periods but the depreciation amount is revised from current year as follows:

Depreciation = (original cost - accumulated depreciation- salvage value)/remaining useful life

= (50000-25000-5000)/ 6 year

= 3333.33

Notes: calculation of remaining useful life

Originally estimated useful life

= original cost /(accumulated depreciation/ 5 years)

= 50000/ (25000/5)

= 10 years

Remaining life = 10 years- 5 years + 1 year = 6 years

2. Change in method of depreciation is also a change in Accounting estimates and following entry of depreciation will be made:

First calculate rate of depreciation in double declining method:

1/ useful life × 2 × 100

1/10×2 ×100 = 20%

Calculation of remaining balance of assets after 2 years

: 40000×20% = 8000

: (40000-8000)×20% = 6400

Remaining wdv after 2 year:

40000- 8000 - 6400 = 25600

New depreciation amount from 2019 :

Remaining cost- salvage value/ remaining life

= (25600- 5000)/ 8

= 2575

3. Wrong addition of residual value of 2000 in the depreciation amount in 2018 is a mistake and to correct the same prior period adjustment is required. Due to above mistake accumulated depreciation balance is increased by 2000 and retained earnings were reduced by 2000, hence following correcting journal entry will be passed:

Accumulated depreciation A/c dr. $ 2000

To retained earnings a/c $ 2000

Further depreciation amount in 2019 will be as follows

Depreciation in 2018

20000 × 40%

8000

Depreciation in 2019

(20000-8000) × 40%

= 4800