Question

Machinery purchased for $60,000 by Tom Brady Co. in 2016 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2021, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.a. Prepare the entry to correct the prior years' depreciation, if necessary.b. Prepare the entry to record depreciation for 2021.

Answer 1

Answer:

a. no entry required

b. Depreciation expense.............................Dr        $4,100

              Accumulated depreciation                                         $4,100

(Being depreciation expense charged to

accumulated depreciation account)

Explanation:

a. When depreciation method is changed, company is not required to pass any entry altering previous year depreciation amount. This is to avoid unnecessary task of preparing previous year financial statements to reflect this change. The method is simply adopted and carried forward in future years.

b. Cost of machinery = $60,000

Salvage value (original) = $4,000

Useful life = 8 years

Annual depreciation = $\frac{60,000 - 4,000}{8}$

                                  = $7,000

Depreciation was charged for 5 years. So, total depreciation charged = 7,000 × 5 = $35,000

Book value of machinery as on 2021 is 60,000 - 35,000 = $25,000

in 2021, it was estimated that useful life of machinery is 10 years

New salvage value is $4,500

Remaining useful life is 10 - 5 = 5 years

Annual depreciation =  $\frac{25,000 - 4,500}{5}$

                                  = $4,100

New Annual depreciation = $4,100

Journal entry:

Particulars                                          Debit                    Credit

Depreciation expense                      $4,100

     Accumulated depreciation                                       $4,100

(Being depreciation expense

charged to accumulated

depreciation account)