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24 November, 10:32

Bailand Company purchased a building for $210,000 that had an estimated residual value of $10,000 and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has used straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense for the year), the following independent situations occur:

1. Bailand estimates that the asset has 8 years' life remaining (for a total of 12 years).

2. Bailand changes to the sum-of-the-years'-digits method.

3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense.

Required:

For each of the independent situations, prepare all the hournal entries relating to the building for the fifth year. Ignore income taxes.

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Answers (1)
  1. 24 November, 10:34
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    1. Journal entry would be as follows:

    Date Debit $ Credit $

    Yr5 End Depreciation expense Account Dr. $15,000

    Accumulated depreciation Account $15,000

    2. Journal entry would be as follows:

    Date Debit $ Credit $

    Yr5 End Depreciation expense Account Dr. $34,285.71

    Accumulated depreciation Account $34,285.71

    3. Journal entry would be as follows:

    Debit $ Credit $

    Yr5 End Depreciation expense Account Dr. $20,000

    Accumulated depreciation Account $20,000

    Yr5 End Accumulated depreciation Dr. $4,000

    Retained earnings $4,000

    Explanation:

    1. According to the given data we would have to make the following calculations to prepare the journal entries relating to Bailand estimates that the asset has 8 years' life remaining (for a total of 12 years)

    Cost of building $210,000

    Less: Salvage $10,000

    Depreciable cost $200,000

    Divide: Life f building 10

    Annual depreciation $ 20.000

    Depreciation for 4 yrs $80,000

    Remaining Book value at end of 4yrs $130,000

    Less: Salvage $10,000

    Remaining depreciable cost $120,000

    Divide: Life of building 8

    Annual depreciation (revised) $15,000

    Therefore, journal entry would be as follows:

    Date Debit $ Credit $

    Yr5 End Depreciation expense Account Dr. $15,000

    Accumulated depreciation Account $15,000

    2. Bailand changes to the sum-of-the-years'-digits method.

    Therefore, Remaining Book value at end of 4yrs $130,000

    Less: Salvage $10,000

    Depreciable cost$120,000

    Sum of years digit for remaining 6yrs 21

    (6+5+4+3+2+1)

    Depreciation of 5th year $34,285.71

    (120000/21*6)

    Therefore, journal entry would be as follows:

    Date Debit $ Credit $

    Yr5 End Depreciation expense Account Dr. $34,285.71

    Accumulated depreciation Account $34,285.71

    3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense

    Therefore, Depreciation to be charged for 4 yrs under SLM $80,000

    Depreciation which hass been charged $84,000

    (210000/10*4)

    Depreciation overcharged $4,000

    Annual depreciation under SLM for 5th year $20,000

    Therefore, journal entry would be as follows:

    Debit $ Credit $

    Yr5 End Depreciation expense Account Dr. $20,000

    Accumulated depreciation Account $20,000

    Yr5 End Accumulated depreciation Dr. $4,000

    Retained earnings $4,000
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