BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
258 views

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. 1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).
  2. 2. Bailand changes to the sum-of-the -years’-digits method.
  3. 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.

DateAccount Title & ExplanationDebit ($)Credit($)
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).

DateAccount Title & ExplanationDebit ($)Credit($)
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

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Explain why depreciation on an existing asset is always irrelevant.

Managerial Accounting: The Cornerstone of Business Decision-Making

Define the term marketing

MKTG 12:STUDENT ED.-TEXT

SCENARIO ANALYSIS Your firm, Agrico Products, is considering a tractor that would have a cost of 36,000, would ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)