Question

(Depreciation—Change in Estimate) Machinery purchased for \(60,000 by Tom Brady Co. in 2013 was originally estimated to have a life of 8 years with a salvage value of \)4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2018, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.

Instructions

1. Prepare the entry to correct the prior years’ depreciation, if necessary.
2. Prepare the entry to record depreciation for 2018.

Short answer

Answer

1. No entry required
2. Accumulated depreciation = $4,100

Step-by-step solution

Meaning of Depreciation

Depreciation can be stated as the decline in the value of an asset over a useful period. All assets depreciate over time, except for land, whose value increases with the passage of time. Among the various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

(a) Preparing journal entry.

Since changes in estimations are handled in the current and prospective periods, no corrective entry is required.

(b) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
2018	Depreciation Expense	4,100
	Accumulated Depreciation Machinery		4,100

Working Notes:

Computing revised depreciation expenses

Particulars	Amounts in ($)
Acquisition of cost	$ 60,000
Less: Accumulated depreciation	35,000
Book value in 2018	25,000
Less: Revised residual value	$4,500
Depreciable assets	$20,500
Remaining useful life (10-5)	5 years
Depreciation expense	$4,100

Working Notes:

Calculation of accumulated depreciation

$\begin{array}{rcl}\text{Accumulated}\text{depreciation}& =& \frac{\text{Acquisition}\text{cost}-\text{Salvage}\text{value}}{\text{Estimated}\text{life}}\times \text{Depreciation}\text{year}\\ & =& \frac{\$60,000-\$4,000}{8}\times 5\\ & =& \$35,000\end{array}$

Calculation of depreciation expense

$\begin{array}{rcl}\text{Depreciation}\text{expense}& =& \frac{\text{Depreciable}\text{assets}}{\text{Remaining}\text{useful}\text{life}}\\ & =& \frac{\$20,500}{5}\\ & =& \$4,100\end{array}$