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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.

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Answer #1
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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