Question

On January 1, 2013, Powell Company purchased a building and equipment that have the following useful lives, salvage value, and costs.

Building, 25-year estimated useful life, $4,000,000 cost, $400,000 salvage value

Equipment, 15-year estimated useful life, $600,000 cost, no salvage value

The building has been depreciated under the straight-line method through 2017. In 2018, Powell decided to change the total useful life of the building to 30 years. The equipment is depreciated using the straight-line method, but in 2018, the company decided to switch to the double-declining balance method of depreciation for the equipment and changed the salvage value to $60,000.

Instructions

(a)    Prepare the journal entry necessary to record the depreciation expense on the building in 2018.

(b)    Compute depreciation expense on the equipment for 2018.

Answer 1

Answer a.

Calculation of Depreciation on Building
Cost of building		$4,000,000
Salvage Value		$400,000
Depreciation value		$3,600,000
Life of Building		25
Depreciation per year		$144,000
Year Up to end of 2017		5
Accumulated Depreciation for 5 years = 5*144000		720000
Book value on 1st Jan 2018 = $4000000-$720000=		$3,280,000
Revised total life of building		30
Remaining life of Building		25
Salvage value assumed to be same		$400,000
Depreciation value		$2,880,000
Depreciation per year = $2880000/25		$115,200

2018
Date	Account	Debit	Credit
31-Dec	Depreciation Expense	$115,200
	Accumulated Depreciation-Building		$115,200
	Depreciation Expense recorded for 2018

Answer b.

Calculation of Depreciation on Equipment
Cost of equipment		$600,000
Salvage Value		$0
Depreciation value		$600,000
Life of Equipment		15
Depreciation per year		$40,000
Year Upto end of 2017		5
Accumulated Depreciation for 5 years = 5*40000		200000
Book value on 1st Jan 2018 = $4000000-$720000=		$400,000
Remaining life of Equipment		10
Salvage value assumed to be same		$60,000
Rate of Depreciation unde DDB = 1*2*100/10		20%
Depreciation for 2018 = 20% of $400000 =		$80,000

2018
Date	Account	Debit	Credit
31-Dec	Depreciation Expense	$80,000
	Accumulated Depreciation -Equipment		$80,000
	Depreciation Expense recorded for 2018

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