Question

Machinery purchased for $67,200 by Coronado Co. in 2016 was originally estimated to have a life of 8 years with a salvage value of $4,480 at the end of that time. Depreciation has been entered for 5 years on this basis. 2021, it is determined that the total estimated life should be 10 years with a salvage value of $5,040 at the end of that time. Assume straight-line depreciation. Prepare the entry to record depreciation for 2021. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Use Machinery related account.)

Answer 1

Answer:

Entries need for recording depreciation given the change in estimation is:

Dr Depreciation expenses                 4,592

Cr Accumulated depreciation           4,592

( to record depreciation expenses in the year of 2021, given depreciation estimate changes)

Explanation:

Relating to the change in depreciation estimate, the firm will not have to book any adjustment in previous depreciation expenses which is based on the old estimate, instead it will have to re-calculate depreciation expenses given the new estimate which are shown as below:

The net book value as at the beginning of 2021 is:

Purchase price - accumulate depreciation over 5 year

in which: purchase price = $67,200

               accumulated depreciation over 5 year = depreciation expenses per yer x 5 = ( 67,200 - 4,480) /8 * 5 = $39,200

Thus, net book value at the beginning of 2021 is $28,000 which will be used to determine depreciation expense per year for the remaining 5 years of useful life, calculated as:

Depreciation per year: (28,000 - 5,040)/5 = $4,592.

Answer 2

Answer:

Dr Depreciation charge (Profit or loss) $4,592

Cr Accumulated depreciation (B/S)        $4,592

Explanation:

The change in useful life of machinery is a change in accounting estimate and is treated prospectively. The depreciation charge with the useful life of eight years and $4,480 residual value was $7,840 per annum ($67,200-$4,480)/8.

After five years (end of 2020), the NBV of the machine is $28,000 with a residual value of $5,040. Thus the depreciation charge from 2021 onwards is $4,592 calculated as ($28,000-$5,040)/5.