Question

On January 1, 2014, Carla Company purchased a building and equipment that have the following useful lives, salvage values, and costs. Building, 40-year estimated useful life, $52,400 salvage value, $859,200 cost Equipment, 12-year estimated useful life, $9,200 salvage value, $108,200 cost The building has been depreciated under the double-declining-balance method through 2017. In 2018, the company decided to switch to the straight-line method of depreciation. Carla also decided to change the total useful life of the equipment to 9 years, with a salvage value of $4,400 at the end of that time. The equipment is depreciated using the straight-line method. (a) Prepare the journal entry necessary to record the depreciation expense on the building in 2018. (Round answers to O decimal places, e.g. 125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit (b) Compute depreciation expense on the equipment for 2018. (Round answers to 0 decimal places, e.g. 125.) 2018 Depreciation expense

Answer 1

Solution Required (a) Cost of Building Salvage value Depreciable cost ($859,200 - $52,400) Estimated Useful life $859,200 $52,400 $806,800 40 Years Step-1 : Calculate the Book value/WDV of Building at the end of Year 2017 2.50% Straight line depreciation rate (100% / 40 Years) Double declining depreciation rate (2.5% x 2) 5.00% WDV Year 2014 2015 2016 2017 Depreciation $859,200 x 5% = $816,240 x 5% = $775,428 x 5% = $736,657 x 5% = $42,960 $40,812 $38,771 $36,833 $816,240 $775,428 $736,657 $699,824 Step-2 : Calculate the Depreciation expense for year 2018 WDV/Book value at the beginning of Year 2018 Less: Salvage value Depreciable cost at the beginning of Year 2018 $699,824 ($52,400) $647,424 Remaining useful life at the beginning of Year 2018 (40-4) 36 Years The change of depreciation method is an change in accounting estimate, hence the depreciation shall be calculated prospectively with the changed method. Depreciation expense for Year 2018 = $647,424 / 36 years = $17,984 Step-3: Journal Entry Credit Account Titles and Explanation Depreciation Expense Accumulated Depreciation-Building Debit $17,984 $17,984

Required (b) Cost of equipment Salvage value Depreciable cost ($108,200 - $9,200) Estimated Useful life $108,200 $9,200 $99,000 12 Years Yearly Depreciation = $99,000 / 12 Years = $8,250 Step-1 : Calculate the Book value of equipment at the end of Year 2017 Depreciation expense for the Year 2014 Depreciation expense for the Year 2015 Depreciation expense for the Year 2016 Depreciation expense for the Year 2017 Accumulated depreciation at the end of Year 2017 $8,250 $8,250 $8,250 $8,250 $33,000 WDV at the end of year 2017 ($108,200 - $33,000) $75,200 Step-2 : Calculate the Depreciation expense for year 2018 WDV/Book value at the beginning of Year 2018 Less: Revised Salvage value at the beginning of Year 2018 Revised depreciable cost at the beginning of Year 2018 $75,200 ($4,400) $70,800 Revised total useful life of the equipment Remaining useful life at the beginning of 2018 (9-4) 9 Years 5 Years Depreciation expense for 2018 = $70,800 / 5 Year = $14,160 2018 Depreciation expense | $14,160