Question

Sadler Corporation purchased equipment to be used in manufacturing. The purchase was made at the beginning of 2015 by paying cash of $150,000. The equipment has an estimated residual value of $10,000 and an expected useful life of 10 years. At the beginning of 2017, Sadler concluded that the total useful life of the equipment will be 8 years rather than 10, and that the residual value will be zero. Sadler uses the straight-line method for depreciation.
Required:
a) Prepare the journal entry to record depreciation on the equipment for 2016.
b) Prepare the journal entry to record depreciation on the equipment for 2017 including the effect of the changes in estimates.

Answer 1

Answer:

a) Debit Depreciation expense  $14,000

   Credit Accumulated depreciation  $14,000

Being entries to record depreciation expense for 2016

b) Debit Depreciation expense  $26,666.67

   Credit Accumulated depreciation  $26,666.67

Being entries to record depreciation expense for 2017

The effect of a change in estimate is a reduction of the annual depreciation from $14,000 to $26,666.67 (increase of $12,666.67) annually

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,  

Depreciation = (Cost - Salvage value)/Estimated useful life

Annual depreciation

= (150,000 - 10,000)/10

= $14,000

At the beginning of 2017,

Net book value of asset

= $150,000 - 2($14,000)

= $124,000

If  Sadler concluded that the total useful life of the equipment will be 8 years rather than 10, and that the residual value will be zero.

Depreciation expense for 2017

= $124,000/6

= $26,666.67