On January 1, 2016, LLC Corporation purchased a building and equipment that have the following useful lives, residual values, and costs. Building, 40-year estimated useful life, P50,000 residual value, P1,200,000 cost Equipment, 12-year estimated useful life, P10,000 residual value, P130,000 cost The building has been depreciated under the double-declining-balance method through 2019. In 2020, the company decided to switch to the straight-line method of depreciation. LLC also decided to change the total useful life of the equipment to 9 years, with a residual value of P5,000 at the end of that time. The equipment is depreciated using the straight-line method. Required a. Prepare the journal entry(ies) necessary to record the depreciation expense on the building in 2020. b. Compute depreciation expense on the equipment for 2020.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 2016, LLC Corporation purchased a building and equipment that have the following useful lives, residual
values, and costs.
Building, 40-year estimated useful life, P50,000 residual value, P1,200,000 cost
Equipment, 12-year estimated useful life, P10,000 residual value, P130,000 cost
The building has been
to switch to the straight-line method of depreciation. LLC also decided to change the total useful life of the equipment to 9
years, with a residual value of P5,000 at the end of that time. The equipment is depreciated using the straight-line method.
Required
a. Prepare the
b. Compute depreciation expense on the equipment for 2020.
Ferguson Co. decides at the beginning of 2019 to adopt the FIFO method of
average-cost method for financial reporting since its inception on January 1, 2017, and had maintained records adequate
to apply the FIFO method retrospectively. Ferguson concluded that FIFO is the preferable inventory method because it
reflects the current cost of inventory on the
change in accounting policy on inventory and cost of goods sold.
Inventory Determined by Cost of Goods Sold Determined by
Date Average-Cost Method FIFO Method Average-Cost Method FIFO Method
January 1, 2017 P P P P
December 31, 2017 100 80 800 820
December 31, 2018 200 240 1,000 940
December 31, 2019 320 390 1,130 1,100
The balance of
For each year presented, sales are P4,000 and operating expenses are P1,000. Ferguson provides two years of financial
statements. Earnings per share information is not required
Required:
a. Prepare income statements under average-cost and FIFO for 2017, 2018, and 2019.
b. Prepare income statements reflecting the retrospective application of the accounting change from the average-cost
method to the FIFO method for 2019 and 2018.
c. Prepare the note to the financial statements describing the change in method of inventory valuation. In the note, indicate
the income statement line items for 2019 and 2018 that were affected by the change in accounting policy.
d. Prepare comparative retained earnings statements for 2018 and 2019 under FIFO.
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