Question

Accounting Fall 2019 Group Exercise 5 Changing an asset's useful life and residual value Senodal Industries uses straight-line depreciation on all of its depreciable assets. The company records annual depreciation expense at the end of each calendar year. On January 11, 2014, the company purchased a machine costing $90,000. The machine's useful life was estimated to be 12 years with an estimated residual value of $18,000. Depreciation for partial years is recorded to the nearest full month. In 2018, after almost five years of experience with the machine, management decided to revise its estimated life from 12 years to 20 years. No change was made in the estimated residual value. TThe revised estimate of the use- ful life was decided prior to recording annual depreciation expense for the year ended December 31, 2018 Required: Prepare journal entries in chronological order for the given events, beginning with the purchase of the ma- chinery on January 11, 2014. Show separately the recording of depreciation expense in 2014 through 2018. 2. 1. What factors may have caused the company to revise its estimate of the machine's useful life? Solution: Debit Credit Date Accounts and explanations

Answer 1

Annual Depreciation based on useful life of 12 years =($90,000 - $18,000) / 12 years =$6,000
Book value as at end of year 2017 =$90,000 - ($6,000*4 years) =$66,000
Revised annual depreciation based on useful life of 20 years =($66,000 - $18,000) / 16 years =$3,000
Depreciation for 2018 =$3,000
Date	Accounts and explanation	Debit	Credit
Jan 11,2014	Machine	$90,000
	Cash		$90,000
Dec 31,2014	Depreciation expenses	$6,000
	Accumulated Depreciation-Machine		$6,000
Dec 31,2015	Depreciation expenses	$6,000
	Accumulated Depreciation-Machine		$6,000
Dec 31,2016	Depreciation expenses	$6,000
	Accumulated Depreciation-Machine		$6,000
Dec 31,2017	Depreciation expenses	$6,000
	Accumulated Depreciation-Machine		$6,000
Dec 31,2018	Depreciation expenses	$3,000
	Accumulated Depreciation-Machine		$3,000
After using the asset for 4 years company may have realized that the actual useful life of the machine is much more
than expected
There may be a change in the Accounting estimate
The company might want to save some taxes for the upcoming years and hence changed the estimated useful life
of the machine to charge depreciation expenses for 20 years in total