Answer:
1. No journal entries are required
2. Debit : Depreciation expense : $3667
Credit : Accumulated depreciation : $3667
Explanation:
1. GAAP stands for Generally Accepted Accounting Principles, which is a set of accounting standards, procedures and principles that public companies in the U.S must follow when they compile their financial statements.
What has happened in the scenario given is an accounting change of a change in accounting estimate. This arises when new information surfaces regarding certain estimates. This is a prospective change whereby a material change in estimates is documented in the financial statements and the change is made going forward. It does not correct or revise the past, and <u>no journal entries are required</u> to change prior financial statements.
2. Sum-of-year's digits is a form of accelerated depreciation which believes that the productivity of an asset reduces overtime, hence so does its depreciation cost. This is calculated as follows:
(Remaining useful life of the asset / sum of the year's digits) x depreciation cost
OR
(Remaining useful life of the asset / sum of the year's digits) x (Cost of asset - salvage value)
In this case however, we are unaware of total depreciation cost. We can use the information provided to obtain this...
We can obtain the sum of years depreciation as follows:
Total number of useful life years = 5
Hence, sum of the year's digits is = 1 + 2 + 3 + 4 + 5 = 15
From January 2016 to January 2018, the machinery has depreciated for 2 years. Since the asset has no salvage value, the cost of asset is the same as the total depreciation cost.
Thus, depreciation for 2016 = 5/15 x 30,000 = $10,000
Depreciation cost for 2017 = 4/15 x (30,000 -20,000*) = $5333
*Previous year depreciation has to be reduced
Total depreciation as of January 2018: $10,000 + $5333 = $15333
Asset value as of January 2018 = 30,000 - $15333 = $14667
Here on wards, it is calculated using straight-line depreciation. This is where the same amount is reduced every year for the period of the asset's life. It is calculated as :
(Cost of asset - residual value) / number of useful life
The asset now has useful life of 6 years. However, 2 has already finished, thus 4 years remaining.
Straight-line depreciation per year = ($14667 - 0) / 4 = $3667
Journal entries:
Debit : Depreciation expense : $3667
Credit : Accumulated depreciation : $3667
(recording the depreciation of machinery)
