Question

Bailand Company purchased a building for $210,000 that had an estimated residual value of $10,000 and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has used straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense for the year), the following independent situations occur:
1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).
2. Bailand changes to the sum-of-the-years’-digits method.
3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense.
Required:
For each of the independent situations, prepare all the hournal entries relating to the building for the fifth year. Ignore income taxes.

Answer 1

Answer:

1. Journal entry would be as follows:

Date                                                          Debit $ Credit $

Yr5 End Depreciation expense Account Dr. $15,000  

                     Accumulated depreciation Account  $15,000

2. Journal entry would be as follows:

Date                                                        Debit $ Credit $

Yr5 End Depreciation expense Account Dr. $34,285.71  

                     Accumulated depreciation Account  $34,285.71

3. Journal entry would be as follows:

                                                                     Debit $ Credit $

Yr5 End Depreciation expense Account Dr. $20,000  

                        Accumulated depreciation Account  $20,000

Yr5 End Accumulated depreciation Dr.  $4,000  

                                        Retained earnings    $4,000

Explanation:

1. According to the given data we would have to make the following calculations to prepare the journal entries relating to Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years)

     

Cost of building $210,000    

Less: Salvage  $10,000    

Depreciable cost $200,000    

Divide: Life f building 10    

Annual depreciation $ 20.000    

Depreciation for 4 yrs $80,000    

Remaining Book value at end of 4yrs $130,000    

Less: Salvage $10,000    

Remaining depreciable cost $120,000    

Divide: Life of building 8    

Annual depreciation(revised) $15,000

Therefore, journal entry would be as follows:

Date                                                          Debit $ Credit $

Yr5 End Depreciation expense Account Dr. $15,000  

                     Accumulated depreciation Account  $15,000

2. Bailand changes to the sum-of-the-years’-digits method.

Therefore, Remaining Book value at end of 4yrs $130,000    

Less: Salvage  $10,000    

Depreciable cost$120,000    

Sum of years digit for remaining 6yrs 21    

(6+5+4+3+2+1)    

Depreciation of 5th year $34,285.71    

(120000/21*6)

Therefore, journal entry would be as follows:

Date                                                        Debit $ Credit $

Yr5 End Depreciation expense Account Dr. $34,285.71  

                     Accumulated depreciation Account  $34,285.71

3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense

Therefore,  Depreciation to be charged for 4 yrs under SLM $80,000  

                     Depreciation which hass been charged  $84,000  

(210000/10*4)      

Depreciation overcharged $4,000  

Annual depreciation under SLM for 5th year $20,000

Therefore, journal entry would be as follows:

                                                                     Debit $ Credit $

Yr5 End Depreciation expense Account Dr. $20,000  

                        Accumulated depreciation Account  $20,000

Yr5 End Accumulated depreciation Dr.  $4,000  

                                        Retained earnings    $4,000