Chapter 11, Problem 13E

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Chapter
Section

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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# 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 journal entries relating to the building for the fifth year. Ignore income taxes.

To determine

Prepare necessary journal entries of Company B for each of the given situations.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Prepare necessary journal entries of Company B for each of the given situations as follows:

Situation 1: Building has remaining useful life of 8 years.

 Date Account Title & Explanation Debit ($) Credit($) Depreciation expense (2) 15,000 Accumulated depreciation-Building 15,000 (To record the depreciation expense incurred at the end of the fifth accounting year)

Table (1)

• Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by $15,000. Therefore, debit depreciation expense account with$15,000.
• Accumulated depreciation is a contra asset, and it decreases the value of asset by $15,000. Therefore, credit accumulated depreciation account with$15,000.

Working note (1):

Calculate the accumulated depreciation expense for four years of building under straight line method.

Accumulated depreciation expense  = Cost of acquisaition Salvage valueEstimated useful life ×4 years=$210,000$10,00010 years×4=$80,000 Working note (2): Calculate the annual depreciation expense for remaining life. Depreciation expense = (Cost of acquisaitionAccumualted depreciation (1)) Salvage valueRemaining useful life =($210,000$80,000)$10,0008 years=$15,000 Situation 2: Company B has changed the deprecation method (sum of the year’s digit).  Date Account Title & Explanation Debit ($) Credit($) Depreciation expense (5) 34,286 Accumulated depreciation-Building 34,286 (To record the depreciation expense incurred at the end of the accounting year) Table (2) • Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by$34,286. Therefore, debit depreciation expense account with $34,286. • Accumulated depreciation is a contra asset, and it decreases the value of asset by$34,286. Therefore, credit accumulated depreciation account with $34,286. Working note (3): Calculate the depreciable base of asset. Depreciable base = [Purchase priceAccumulated depreciaiton] –Residual value =($210,000$80,000(1)) –$10,000=\$120,000

Working note (4):

Calculate the denominator of the fraction for sum-of-the-year’s digit.

Sum-of-the-digits = 6×(n+1)2=6×(6+1)2=6×72=21

Note: In this case, the remaining useful life (6 years) of the asset is considered as “n”(10 years4 years)  to calculate the numerator of the fraction

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