Irwin, Inc., constructed a machine at a total cost of $51 million. Construction was completed at...
Irwin, Inc., constructed a machine at a total cost of $51 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $3 million. At the beginning of 2016, Irwin decided to change to the sum-of-the-years’-digits method.
Ignoring income taxes, prepare the journal entry relating to the machine for 2016.
Homework Answers
| Journal Entries | ||||||
| Date | Particulars | Debit | Credit | |||
| 1.1.2016 | Depreciation A/c | $ 9,163,636.36 | ||||
| To Accumulated Dep | $ 9,163,636.36 | |||||
| (being additional depreciation charged | ||||||
| to make changes retrospectively) | ||||||
| 31.12.2016 | Depreciation A/c | $ 18,327,272.73 | ||||
| To Accumulated Dep | $ 18,327,272.73 | |||||
| (being depreciation for the year 2016 | ||||||
| has been charged under sum of years | ||||||
| method) | ||||||
Workings:
| Depreciation expense under straight line method = | Cost - Residual Value | |||||
| Useful Life | ||||||
| = | $ 51000000 - $ 3000000 | |||||
| 10 | ||||||
| = | $ 4,800,000.00 | |||||
| Depreciation Expense under Sum of year's digit= | ||||||
| Sum of years = | 1+2+3+4+5+6+7+8+9+10 | |||||
| = | 55 | |||||
| Depreciable cost = | $ 51000000 - $ 3000000 | |||||
| = | $ 48,000,000.00 | |||||
| Computation of book value of the machine on 31.12.2015 | ||||||
| SLM | Sum of Yrs | |||||
| 1.1.2013 | $ 48,000,000.00 | $ 48,000,000.00 | ||||
| Less: | Depreciation | $ 4,800,000.00 | $ 8,727,272.73 | (10/55 x $ 48000000) | ||
| 31.12.2013 | $ 43,200,000.00 | $ 39,272,727.27 | ||||
| 1.1.2014 | $ 43,200,000.00 | $ 39,272,727.27 | ||||
| Less: | Depreciation | $ 4,800,000.00 | $ 7,854,545.45 | (9/55 x $ 48000000) | ||
| 31.12.2014 | $ 38,400,000.00 | $ 31,418,181.82 | ||||
| 1.1.2015 | $ 38,400,000.00 | $ 31,418,181.82 | ||||
| Less: | Depreciation | $ 4,800,000.00 | $ 6,981,818.18 | (8/55 x $ 48000000) | ||
| 31.12.2015 | $ 33,600,000.00 | $ 24,436,363.64 | ||||
| 1.1.2016 | $ 24,436,363.64 | |||||
| Less: | Depreciation | $ 6,109,090.91 | (7/55 x $ 48000000) | |||
| 31.12.2016 | $ 18,327,272.73 | |||||
| Less Depreciation Charged under SLM = | $ 336000000 - $ 24436364 (approx) | ||||||
| = | $ 9,163,636.36 | ||||||
| Therefore, we need to charge $ 9163636 as additional depreciation | |||||||
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