Answer:
1. Debit : Equipment Depreciation : $102000
Credit : Equipment Accumulated Depreciation : $102000
2. Debit : Building Depreciation account : $16857
Credit : Building Accumulated Depreciation : $16857
Explanation:
A change in accounting estimate occurs when there is new information that surfaces, affecting the initial situation. It can affect the carrying amount of an asset or liability as well as alter the accounting for existing and future assets or liabilities.
1. The equipment has a cost of $525000 and its depreciation was changed to using the straight line method after 3 years of use. Straight- line depreciation per year:
(Cost of asset - salvage value) / number of useful years.
The cost of asset and the number of useful years left would have to be found since the machine already depreciated using the sum-of-years-digits.
Number of useful years left : 5 - 3 = 2
Accumulated depreciation is required to find what the asset costs at the beginning of 2015.
Depreciation using sum-of-years-digits:
Sum-of-years-digits is an accelerated form of depreciation based on the assumption that an asset’s productivity reduces with time.
(Cost - Salvage value) x (remaining useful life of asset / sum of years digits)
Sum-of-years-digits = 1 + 2 + 3 + 4 + 5 = 15
Depreciation for 2012 :
($525000 - $15000) / (5/15) = $170000
Depreciation for 2013 :
($525000 - $15000) / (4/15) = $136000
Depreciation for 2014 :
($525000 - $15000) / (3/15) = $102000
Total depreciation: $102000 + $136000 + $170000 = $408000
Cost of asset at Jan 2015 = $525000 - $408000 = $117000
Thus, depreciation expense for 2015 = ($117000 - $15000) / 2 = $51000
Debit : Equipment Depreciation : $51000
Credit : Equipment Accumulated Depreciation : $51000
2. The building has a cost of $693000. It is depreciated using the straight-line method of depreciation. Hence, the depreciation expense is the same annually throughout the life of the asset.
Annual depreciation = (Cost of asset - salvage value) / number of useful years
Useful number of years was initially 30 years, later in 2015, it was changed to 40 years.
In order to find the depreciation for 2015, we need to find the cost of asset at the beginning of 2015 and the estimated useful life years left.
Estimated useful life years left : 40 - 3 = 37 years
Cost of asset :
To find this, we require the accumulated depreciation.
Depreciation for one year:
(693000 - 0) / 30 = $23100
$23100 x 3 = $69300 for 3 years
Cost of asset at the beginning of 2015 :
693000 - $69300 = $623700
This would mean that the depreciation expense for 2015 is:
($623700) / 37 = $16857
Debit : Building Depreciation account : $16857
Credit : Building Accumulated Depreciation : $16857
